A STUDY ON TRADE POLICY BETWEEN
INDIA AND JAPAN
INTERNATION BUSINESS
PREPARED BY
MAJID KHAN
MD HASRAT ALI
UNDER THE GUIDANCE OF
Dr. Sripal Srivatava
GALGOTIAS UNIVERSITY
Session - 2023-2024
Topic Page no.
Introduction 03
Indian economy 04
Japan-India trade relations 05
Bilateral relations 05-06
Trade developments 06-07
India-Japan trade basket 08-10
FDI in India 11-13
Japanese companies in India 13-17
India-Japan defence ties 17-18
India – A preferred investment destination 19-22
Opportunity Landscape In India 22-24
Areas of cooperation 25-29
Conclusion 30
References 31
2
Introduction
The trade relationship between India and Japan stands as a testament to
the evolving global economic landscape, marked by strategic
partnerships and collaborative efforts between two economic
powerhouses in the Asia-Pacific region. This relationship has undergone
significant transformations over the years, shaped by geopolitical shifts,
economic reforms, and a shared commitment to fostering mutual growth
and development. In this comprehensive exploration, we delve into the
intricate web of trade policies that bind India and Japan, examining the
historical context, key sectors of collaboration, challenges faced, and the
future trajectory of this crucial economic partnership.
3
Indian economy
Per Deloitte estimates, the Indian economy is poised to grow by 6.4-6.6
percent in FY22–23.i The estimates retain India’s position as the
world’s fastest-growing economy over the next few years, driving world
growth even as several major economies brace themselves for a
slowdown or possibly a recession.
The industrial and services activities remain robust as indicated by high-
frequency indicators, such
as GST collections, Purchasing Managers Index (PMI), retail sales,
export demand, amongst others. The recovering consumption demand
and higher government spending towards capex may spur investment
activity in the economy.
As the Indian economy tides over the short-term disruptions caused by
global geopolitical tensions, inflation, and supply chain disruptions, the
long- term growth prospects for India remain bright.
The government’s big push towards infrastructure building, PLI
schemes, and Atmanirbhar Bharat, amongst others, is foreseen to benefit
growth prospects in the long term. A rapidly growing economy will
revive the foreign investor appetite in India benefitting capital and
currency markets as well.
4
Japan-India trade relations
Bilateral relations
India and Japan have enjoyed strong bilateral relations historically. The
diplomatic relations between the
two countries began in 1952 to further deepen trade, economic, and
cultural relations.ii To deepen trade ties, the two economies signed a
Convention for Avoidance of Double Taxation in 1960.iii
The India-Japan Comprehensive Economic Partnership Agreement
(CEPA) was signed in 2011.iv The agreement aimed at the abolition of
tariffs on traded goods and services over the next
5
10 years. The agreement also encompassed bilateral cooperation in the
fields of investments, intellectual property rights, customs procedures,
and other trade-related services.
India and Japan have maintained cordial cultural relations through
diplomatic visits, commemorative events, tourism fairs, exhibitions,
academic seminars, etc.
Trade developments
The bilateral trade between the two countries has blossomed post the
signing of the CEPA and crossed US$20.0 billion in FY2022 (Figure 1:
Export and import trend between India and Japan). However, post the
signing of the CEPA, India’s trade deficit with Japan nearly doubled in a
span of 11 years to US$8.2 billion in FY2022 from US$5.8 billion in
FY2012.
India’s imports from Japan depicted a CAGR growth of 1.6 percent
while India’s exports to Japan declined by 0.3 percent from FY2012 to
FY2022.vi
Both the governments are working towards a mutually beneficial trade
relationship with the Government of India emphasising on the
6
‘Make in India’ campaign, the PLI scheme, and the diversification of the
trade basket, etc., to strengthen its manufacturing sector and make it
more competitive. This will aid in increasing its contribution to exports.
Export and import trend between India and Japan
2021-22 6,179.5 14,398.5 8,219.0
2020-21 4,423.4 10,892.1 6,468.7
2019-20 4,515.4 12,420.1 7,904.7
2018-19 4,866.5 12,774.1 7,907.6
2017-18 4,733.8 10,976.8 6,243.0
2016-17 3,843.6 9,750.3 5,906.7
2015-16 4,649.4 9,852.3 5,202.9
2014-15 5,370.0 10,137.4 4,767.4
2013-14 6,819.1 9,456.5 2,637.4
2012-13 6,101.1 12,405.4 6,304.3
2011-12 6,364.9 12,125.7 5,760.8
2010-11 5,087.4 8,626.1 3,538.7
2009-10 3,615.1 6,725.8 3,110.7
0 5,000 10,000 15,000 20,000 25,000
Source: Centre for Monitoring Indian economy
7
India-Japan trade basket
India’s chief exports to Japan comprise engineering goods, petroleum
products, and agricultural and allied products (Figure 2: Commodity
composition of India’s exports to Japan). The exports mostly
comprise low value-added goods, such as ferrous and non-ferrous
metals, machine tools and
Commodity composition of India’s exports to Japan
8
India’s chief imports from Japan comprises manufactured products, such
as engineering goods, chemical and related products, electronic goods
(Figure 3: Commodity composition of India’s
imports from Japan). India’s imports mainly comprise high value-added
goods, such as electrical and non-electrical machinery, automobiles,
computer hardware, agro and residual chemicals, amongst others.
9
Commodity composition of India’s imports from Japan
10
FDI in India
Japan is regarded as the fifth largest investor in India with cumulative
FDI worth US$38 billion from April 2000 - September 2022.vii Japan’s
investments in India are spread across transportation, automobile
industry, telecommunications, and services sector. FDI inflows from
Japan have fluctuated and the share in total FDI inflows to India has
declined over
the years even though India remained one of the top invested nations in
2021 (Figure 4: FDI inflows to India from Japan). Auto and services
sectors have been the largest investment sector destinations
for Japan, followed by drugs and pharmaceuticals (Figure 5: Sector-wise
FDI inflows from Japan to India).
FDI inflows to India from Japan
11
Sector-wise FDI inflows from Japan to India
During the 14th India-Japan annual summit in CY2022, both the
economies set an investment target of JPY5 trillion for the next five
years.viii Some of the proposed projects are in the areas stable energy
and infrastructure development. The projects in the pipeline include the
Mumbai- Ahmedabad High-Speed Rail (MAHSR) project, the
Mumbai Trans Harbour Link, and the Delhi-Mumbai Industrial Corridor
with 12 industrial townships, the Chennai-Bengaluru Industrial
Corridor besides the Clean Energy Partnership, and the Sustainable
Development Initiative for North-East India. The FDI is expected to be
utilised for public and private projects of mutual interest.ix
Japan’s investment in the transportation sector is of paramount
importance, which includes the Delhi Mass Rapid Transport System
Project,
Hyderabad Outer Ring Road Project, Visakhapatnam
12
Port Expansion Project, and dedicated Freight Corridor Project.x
Japanese Companies In India
In the wake of the rising geopolitical tension,
Japan has been incentivising its companies to shift manufacturing
facilities out of China to India, Vietnam, Bangladesh, Myanmar, and
Thailand. The rapidly
weakening yen, global supply-chain constraints, geopolitical risks and
changing wage patterns, and surging labour costs in other nations are
prompting Japanese manufacturers to move back home.
Japanese manufacturers have sought to shift base out of China as wages
in China rose and infrastructure in countries, such as Vietnam,
Bangladesh improved. Due to the rising COVID-19 infections in China
and the enforcement of the Zero- COVID policy, global supply chains
have been badly
affected. In 2020 alone, over 1,700 Japan-invested
firms and manufacturers pulled out of China.
India remains a lucrative option for establishing a manufacturing base
for Japanese companies with stable political framework, strong growth
prospects, pro-growth government, and low wages amongst others. Per
DnB Hoovers data, currently there are more than 4,000 Japanese
companies operating in India, and only 113 Indian companies operating
in Japan. Japan is the only country in the world with
12 dedicated country-focused industrial townships across nine states all
over India.xii Japanese firms may continue to expand their presence in
India as an alternative base to China in the coming days.
13
Japanese investment
Source: Mergermarket
14
Japan headquartered companies in India
Source: DnB Hoovers
15
India companies headquartered in Japan
Per Deloitte’s survey report India’s FDI opportunity - Through the
investor’s lens India remains an attractive investment destination. The
business leaders said that when identifying investment destinations, they
look for growth, political and economic stability, and a skilled
workforce. India scored well for its skilled workforce and prospects for
economic growth, both seen as supporting the momentum behind FDI.
However, the awareness of Japanese investors (only 16 percent were
aware of recent reforms undertaken by the government, such as the
digitisation of customs clearance and production linked incentives (PLI)
for manufacturers) regarding government’s efforts to increase trade and
FDI remains low. The government efforts to publicise their recent
reforms may further enhance Japanese investors’ appetite in the Indian
economy.
16
Multinational companies planning investments in India
India-Japan Defence Ties
India and Japan have extended defence cooperation to guard regional
and global security. The two countries seek peace, security, and stability
in the Indo-Pacific region.
As part of the military negotiations, the two countries have initiated
interactions between the Indian Army, Air Force, and Navy, and Japan’s
Ground Self-Defense Force, Air Self-Defense Force, and Maritime Self-
Defense Force. The defence forces conduct annual bilateral exercises
namely JIMEX (naval), SHINYUU Maitri (Air Force), and Dharma
Guardian (Army). They also participate in Malabar exercise (Naval
Exercise) with the USA and Australia.
India and Japan have signed the ‘Acquisition and
Cross-servicing Agreement’, which promises reciprocal provision of
supplies and services between the armed forces of the two countries.
17
Furthermore, the two countries are engaged in cooperative research in
newer-age military equipment and robotics as well.
The Japanese government intends to send India stealth naval antennas.
The two countries are exploring new areas, such as electromagnetic
spectrum, space, high energy lasers, cryptography, sensors, optic cables.
To increase defence cooperation, India and Japan have identified
initiatives in the areas of Unmanned Aerial Vehicles (UAVs), anti-drone
systems, robotics, underwater communication, Li-ion battery
technology, and intelligence systems.
At the first India-Japan Defense Industry Dialogue, the two countries
discussed the sectors in which they could cooperate. These include areas,
such as building warships and submarines, participating in the Advanced
Medium Fighter (AMCA) of India. And in parts, components, and
materials used in the manufacture of these different platforms.xiv
India and Japan, along with Australia and the US, are a part of the
strategic ‘Quadrilateral Security Dialogue’ and may continue to work
together to enhance international peace and security. They have signed a
civil nuclear partnership deal as well, according to which, Japan
promises to supply materials and technologies to build India’s nuclear
power programme.
18
India – A preferred investment destination
India remains the fastest growing economy globally
The world economic growth is likely to slow down
in 2022 owing to the COVID-19 pandemic, the ongoing war between
Russia and Ukraine, high inflationary pressures globally, withdrawal of
monetary accommodation by the leading central
banks, etc. However, the Indian economy is likely to
remain the fastest growing economy globally. Per the
World Bank, India is poised to grow by 8.7 percent in CY2022 and 6.9
percent in CY2023, which is faster than other economies (Figure 10:
World Bank economic projections). Even Deloitte expects India’s
19
recovery to be strong.xv The same augurs well for inviting foreign
investments to India.
World Bank economic projections
20
India’s Ranking In The World Competitiveness Index Remains Stable
Government of India's reformist agenda has helped the country jump
from 43rd rank to 37th on IMD's Competitive Business Index in
CY2022, thus
improving its performance globally (Figure 11: World Competitiveness
Index Ranking). India has depicted significant improvements in
government efficiency, business legislation, and societal framework over
the years.
The government is focused on improving the investment climate in India
with its pro-growth measures, which including the following:
21
Opportunity Landscape In India
The government invites foreign investor participation in the Indian
economy across sectors including infrastructure, asset monetisation,
clean technology, and start-ups.
Key opportunity segments
Manufacturing and automobiles
Japan has the expertise in the fields of robotics, drone manufacturing,
and AI and can collaborate with India.
In the auto segment, Japan has an established expertise in the Electric
Vehicles (EVs) segment and can help India in rapid adoption of the EVs
segment with the technology transfer.
Health care
Japan may help in the establishment of health care logistics centres,
utilisation of ICT for tertiary health care centres, human resource
development
in the field of emergency and
trauma care, etc.
Japan and India may extend cooperation in dealing with the COVID-19
pandemic by sharing medical aid, vaccines, and medicines.
22
Start-ups
India and Japan have a huge potential
to collaborate in building the start-up
ecosystem in the fields
of technology, finance,
and sustainable energy, amongst others.
Recognising the potential, India and Japan start-up hub was established
in 2018.
Infrastructure and townships
India plans to build its infrastructural sector targeting investments worth
US$1 trillion over a span of the next five years.
It is an opportunity for Japan to build industrial townships, railways,
highway networks, airports, multi-modal national parks, and health care
infrastructure.
23
Finance
Japan is an eminent global financial hub catering to financial services,
such as commercial banking,
investment banking,
insurance.
The GIFT City is an attractive opportunity for Japanese companies
looking to foray into the financial sector of India.
Sustainable energy resources
India and Japan instituted a ‘Clean Energy Partnership’ in March 2022.
Both the countries may collaborate on EVs, EV charging infrastructure,
solar sector development, biofuels, green hydrogen, and battery storage
amongst others.
IT
The two countries may collaborate in digital innovation, e-commerce,
fintech lending, embedded financing, etc.
India and Japan may continue to strengthen bilateral cyber cooperation
as well to strengthen their cyber security.
24
Areas of cooperation
Agriculture
Japan has limited availability of arable land and farming is mostly
practiced in small areas. Due to this, it depends on imports to meet its
food requirement. India is predominantly an agrarian
economy having the potential to export agricultural products.
Nevertheless, the export share of India’s agrarian and allied products in
total Japanese exports stand at a minuscule share of 0.2 percent per
CMIE estimates. Therefore, the two economies may seek to broaden ties
in the agrarian sector.
Mining
Japan has limited mining deposits. However, the economy manufactures
automobiles, electronic goods, and machinery, which requires an
undisrupted supply of metals as raw materials. India is a leading
exporter of mica, iron ore, manganese ore, etc., to the world. Per the
World Bank data, Japan sources less than 2.0 percent share of its metals
from India.xvi
Japan has been traditionally sourcing its metal requirements from
Australia, Chile, Brazil, the
United States, and Canada. However, the COVID-19 pandemic and
geopolitical tensions have led to supply disruptions highlighting the need
25
to diversify raw material suppliers. The Indian mining sector may look
forward to tapping this opportunity.
Manufacturing
Japan boasts of a competitive and diversified manufacturing sector. It is
the world’s leading manufacturer and exporter of automobiles, consumer
electronic goods, semiconductors, amongst others. However, the
working-age population in Japan is sparse and requires a well- qualified
and technically equipped workforce for its industries. The Indian
economy boasts of a well-
educated and highly skilled labour force. The Indian workforce may
seek employable opportunities in the Japanese manufacturing sector and
benefit from the sharing of expertise.
Skill Development
India and Japan signed a Memorandum of Cooperation (MoC) in skill
development in 2016.xix Japan has been proactively contributing to the
‘Skill India’ programme with the formation of the
Japan-India Institute of Manufacturing and Japanese
endowed courses in Indian Engineering Colleges. The MoC further
promotes the movement of skilled workers from India to Japan in
designated sectors and job profiles.
India has contributed significantly towards the growth of global
organisations, with Global Capability Centres (GCCs) utilising quality
talent and capabilities in India. India has become home to capability
centres of 1,300+ global organisations, directly employing 1.3+ million
people, and
generating approximately US$33.8 billion in revenue, as of FY2020.xx
There are a plethora of opportunities for Japan to benefit from India’s
talent pool.
26
Infrastructure
The Government of India plans to build its infrastructural sector
targeting investments worth US$1.4 trillion over a span of the next five
years.
Japan has traditionally invested heavily in India’s infrastructural space
with ongoing projects in roadways, railways, industrial corridors,
amongst others. The Japanese economy aims to broaden its engagement
in overseas infrastructural projects to widen its exports. The High
Speed Rail Training Institute for the MAHSR corridor in Vadodara
will receive simulators to train workforce for
the Ahmedabad-Mumbai bullet train project. Additionally, Japan
International Cooperation Agency
( JICA) signed a loan agreement to provide an Official
Development Assistance (ODA) loan of INR6,000 crore (1,00,000
million Japanese yen) towards the third tranche for this MAHSR project.
Hence the Government of India’s focus on building railways, highway
networks, airports, multi-modal national parks, and health care
infrastructure presents a plethora of opportunities for
Japanese firms.
Automobile industry
Japan is regarded as the world’s leading automobile manufacturing
country. Japan and India have mutually benefitted from collaboration in
the auto and ancillary sector historically. Automobiles are
a prominent part of India’s import basket from Japan. Furthermore,
several Japanese automobile companies have set up a manufacturing
base in India catering to Indian customers.
27
The two economies may continue to reap benefits
from collaboration in the auto and ancillary space.
Electrical vehicles
The Indian economy is rapidly switching to the EV segment with the
goal to achieve net-zero carbon emission. The NITI Aayog aims to
achieve EV sales penetration of 70 percent for commercial cars, 30
percent for private cars, 40 percent for buses, and 80 percent for two-
and three-wheelers by 2030.xxii The government is building the
necessary infrastructure, such as charging stations, rechargeable batteries
for adopting the hybrid and EV segment.
This has provided a golden opportunity for Japanese firms to deepen
their existence in India’s automobile segment. Japanese auto makers are
working on a new EV battery type which charges quickly, is
lighter, and safer than old EV batteries. The Indian EV
segment may benefit from innovations in EV space
Digitalisation and e-commerce
The COVID-19 pandemic has led to the rapid adoption of digitalisation
and the development of an e-commerce ecosystem in India. The e-
commerce segment has seen huge progress in sectors, such
as consumer durables, clothing, pharmacy, EdTech. Also, the e-
commerce sector has created many tech- related jobs in recent times.
The India Brand Equity Foundation (IBEF ) estimates the Indian e-
commerce
market to grow by US$350 billion by 2030.
The tech-savvy Japanese firm may consider investing
in this sector.
Tourism
28
Japan has been expanding its tourism sector by easing visa requirements,
consumption tax
exemptions for foreign visitors, building a strong transportation network,
etc. This expansion across has created a thriving demand for restaurants
and hotels. The Indian hospitality sector may explore profitable
opportunities from this.
India and Japan have enjoyed strong cultural and economic ties since
time immemorial. Nevertheless, there is scope to broaden economic
integration in the future as well. Japan exhibits a comparative advantage
in the field of manufacturing. The Indian workforce is skilled, well
trained, and globally competitive. A sharing of expertise in fields of
comparative advantage may prove beneficial for both economies during
the coming years.
29
Conclusion
India and Japan have enjoyed strong cultural and economic ties since
time immemorial. Nevertheless, there is scope to broaden economic
integration in the future as well. Japan exhibits a comparative advantage
in the field of manufacturing. The Indian workforce is skilled, well
trained, and globally competitive. A sharing of expertise in fields of
comparative advantage may prove beneficial for both economies during
the coming years.
30
References
i. https://www2.deloitte.com/in/en/pages/about-deloitte/articles/India-economic-outlook-October-
2022.html
ii. https://www.mea.gov.in/Portal/ForeignRelation/India-Japan_Bilateral_Brief_feb_2020.pdf
iii. https://mea.gov.in/bilateral-documents.htm?dtl/6309/Agreement+for+Avoidance+of+Double+Taxation
iv. https://commerce.gov.in/international-trade/trade-agreements/india-japan-cepa/
v. https://www.mofa.go.jp/region/asia-paci/india/data.html
vi. CMIE database, November 2022
vii. Ibid
viii. https://pib.gov.in/PressReleseDetail.aspx?PRID=1807373
31
