Land of rising trade

India-Japan Cepa will help if Japan invests more in India

After years of ‘studying’ India, Japan has finally taken a long-term strategic view of the bilateral relationship and has given its imprimatur to a Comprehensive Economic Partnership Arrangement (Cepa). This will surely boost bilateral trade and increase Japanese investment in India, but it will also strengthen people-to-people relations between the two Asian democracies. The Cepa is expected to more than double bilateral trade from $10.3 billion to $ 25 billion by 2014. While this is an impressive increase, it pales in comparison to the existing level of bilateral trade between India and China, estimated at $60 billion, or Sino-Japanese trade, estimated at $ 302 billion. So this is just the beginning and there is a long road ahead to be travelled. Japan’s 97 per cent tariff reduction on goods from India will benefit India’s exports. Given that non-tariff barriers are often an issue with Japan, it is significant that Japan has agreed to accord ‘national treatment’ to Indian generic pharmaceuticals. This could pave the way for Indian generics to enter developed country markets more easily.

The Cepa has merely formalised a process that has been underway for a few years, particularly with regard to Japanese investment in India. Japanese companies have been eyeing the Indian market with greater interest, especially in the capital goods sector. A recent survey of over 600 Japanese companies indicated that 75 per cent looked upon India favourably as an investment destination (compared to 72 per cent for China). While too much should not be read into these numbers, results on the ground attest to this changing perception. While Japanese automobile companies, such as Toyota and Honda, have had a presence in India for some time now, the capital goods sector has seen the entry of several world leaders, such as Mitsubishi, Hitachi and Fujitsu, establishing joint ventures with Indian companies to leverage the rapid expansion of the domestic power sector. Given that the Mumbai-Delhi industrial corridor has become the showpiece of the recent Indo-Japanese cooperation, the Cepa will make a real difference if it encourages Japanese FDI.

It would be premature to characterise Japanese interest in India and China as a zero-sum game. However, Japan is increasingly wary of China’s increasing assertiveness on the back of rapidly growing economic and strategic power. Increasing labour costs in China, particularly along the eastern seaboard, coupled with increasingly arbitrary decision making, has led to a rethink on further investment in China. India, with its large domestic market, rapidly growing economy and increasing availability of skilled labour, could emerge as an alternative. However, the investment environment still needs to be a lot more investor friendly, while the state of physical infrastructure leaves a lot to be desired. Above all, the India-Japan Cepa, along with similar trade agreements with South Korea and Malaysia, characterises a growing fatigue with multilateral agreements that are spinning their wheels. While bilateral trade agreements are a second-best solution, India must do its best to derive the maximum benefit from the possibilities that arise from Cepa and similar agreements.