Forging a Comprehensive Forging a Comprehensive Economic Partnership between Economic Partnership between

Japan and India:Japan and India:Prospects and ChallengesProspects and Challenges

Masahiro KawaiMasahiro Kawaiandand

BiswaBiswa N. N. BhattacharyayBhattacharyayAsian Development Bank InstituteAsian Development Bank Institute

“India-Japan Economic Cooperation”Indian Council for Research on International Economic Relations

New Delhi, 14 July 2008

OutlineOutline1. Introduction1. Introduction2. Historical Relationship2. Historical Relationship3. Economic Trends and Characteristics: 3. Economic Trends and Characteristics:

Sharing Mutual Sharing Mutual ComplementarityComplementarity4. Trade Patterns and Production Linkage4. Trade Patterns and Production Linkage5. Patterns of FDI, Financing and ODA5. Patterns of FDI, Financing and ODA6. Japan6. Japan--India Bilateral Economic India Bilateral Economic

PartnershipPartnership7. Regional and Global Dimensions of Japan7. Regional and Global Dimensions of Japan--

India CooperationIndia Cooperation8. Future Prospect8. Future Prospect

1. Introduction1. Introduction•• What is the potential for JapanWhat is the potential for Japan--India economic India economic

partnership/cooperation?partnership/cooperation?•• What type of partnership/cooperation?What type of partnership/cooperation?•• How can Japan and India maximize gains from How can Japan and India maximize gains from

their complementary trade and FDI relations?their complementary trade and FDI relations?•• What sort of Comprehensive Economic What sort of Comprehensive Economic

Partnership Agreement (CEPA) should the two Partnership Agreement (CEPA) should the two countries achieve? countries achieve?

•• Going beyond bilateral partnership, how can Going beyond bilateral partnership, how can Japan and India work together in the regional Japan and India work together in the regional and global context?and global context?

2. Historical Relationship2. Historical Relationship•• Cultural tiesCultural ties

-- 66thth century A.D. : Buddhism was introduced in Japan century A.D. : Buddhism was introduced in Japan through Indian priestthrough Indian priest

•• JapanJapan’’s economic relations with Indias economic relations with India-- 1958: Japan extended its first yen loan to India1958: Japan extended its first yen loan to India-- 19601960--1980: bilateral relationship relatively inactive1980: bilateral relationship relatively inactive-- Aug. 2000: agreed for a JapanAug. 2000: agreed for a Japan--India Global PartnershipIndia Global Partnership

•• ““JapanJapan--India Partnership in a New Asian Era,India Partnership in a New Asian Era,”” 20052005-- expanding traditional bilateral relations that promote expanding traditional bilateral relations that promote security, stability, prosperity in Asia while advancing security, stability, prosperity in Asia while advancing international peace, equitable development and shared international peace, equitable development and shared commitment to work together to promote the commitment to work together to promote the vision of a united East Asian communityvision of a united East Asian community

3. Sharing Mutual 3. Sharing Mutual ComplementarityComplementarity•• Japan as the 2Japan as the 2ndnd largest economy in the worldlargest economy in the world

-- Outward orientation, technological progressOutward orientation, technological progress-- Continuous globalization of Japanese firmsContinuous globalization of Japanese firms-- But But Japan faces a number of challenges to sustained Japan faces a number of challenges to sustained growthgrowth——deflation, public debt, widening income deflation, public debt, widening income disparities and rapidly ageing populationdisparities and rapidly ageing population

•• IndiaIndia’’s dynamic economic growth since the 1990ss dynamic economic growth since the 1990s-- Economic reforms and openEconomic reforms and open--door policydoor policy-- India will continue to grow fast (by more than 5% India will continue to grow fast (by more than 5% year) for the next 30 years. year) for the next 30 years. -- Its economy will be larger than that of Japan by 2032 Its economy will be larger than that of Japan by 2032 and close to US GDP by 2050 and close to US GDP by 2050 (Wilson et al, 2003)(Wilson et al, 2003)

3. Sharing Mutual 3. Sharing Mutual ComplementarityComplementarityJapanJapan--India India ComplementarityComplementarity•• JapanJapan’’s comparative advantage include: (i) capital, (ii) s comparative advantage include: (i) capital, (ii)

technological skills, and (iii) new product developmenttechnological skills, and (iii) new product development-- Japan is worldJapan is world’’s 2nds 2nd--biggest spender on technology after US.biggest spender on technology after US.

•• IndiaIndia’’s strength include: (i) highs strength include: (i) high--quality, abundant, quality, abundant, young, Englishyoung, English--speaking labor force, (ii) large market speaking labor force, (ii) large market size, and (iii) knowledgesize, and (iii) knowledge--based servicesbased services. . -- Given its manpower, Indian companies in business process Given its manpower, Indian companies in business process outsourcing would meet needs of Japanese companies.outsourcing would meet needs of Japanese companies.

•• Differences in population dynamics between Japan and Differences in population dynamics between Japan and IndiaIndia-- Japan is an ageing society and India has a large younger Japan is an ageing society and India has a large younger population base, making these economies complementarypopulation base, making these economies complementary

4. Trade and Production Linkage4. Trade and Production LinkageJapanJapan--India TradeIndia Trade•• JapanJapan--India trade is small, relative to trade with India trade is small, relative to trade with

respective trading partnersrespective trading partners•• JapanJapan--India trade patters India trade patters

-- IndiaIndia’’s major exports to Japan are gems & jewelry, marine s major exports to Japan are gems & jewelry, marine products, iron ore, petroleum, cotton yarn, fabrics products, iron ore, petroleum, cotton yarn, fabrics -- JapanJapan’’s major exports are machinery (transport equipment, s major exports are machinery (transport equipment, machine tool, etc.), electronic goods,, iron and steel products,machine tool, etc.), electronic goods,, iron and steel products,organic chemicals, plastic materialsorganic chemicals, plastic materials-- Share of intermediate inputs and parts & components in Share of intermediate inputs and parts & components in IndiaIndia’’s total exports is limiteds total exports is limited

•• This suggests a large potential for IndiaThis suggests a large potential for India’’s integration s integration with East Asia through participation in East Asiawith East Asia through participation in East Asia’’s s supply chains and production networks. A Japansupply chains and production networks. A Japan--India India comprehensive FTA can facilitate this processcomprehensive FTA can facilitate this process

4. Trade and Production Linkage4. Trade and Production Linkage

Table 1. Annual trade growth in India and JapanTable 1. Annual trade growth in India and Japan

Table 2. Share of export & import in GDP (%)Table 2. Share of export & import in GDP (%)3.53.55.45.418.518.57.07.0ImportsImports5.95.95.55.515.515.510.010.0ExportsExports

20012001--20052005

19951995--2000200020012001--2005200519951995--20002000Japan (%)Japan (%)India (%)India (%)

11.411.47.87.824.224.212.212.2ImportsImports13.413.49.29.220.520.511.011.0ExportsExports

20052005199519952005200519951995Japan (%)Japan (%)India (%)India (%)

• Significant increase for India

Trade and Production LinkageTrade and Production Linkage

157,067157,06773,13673,13673,13673,13694,33694,33652,10952,10942,22842,22875,31275,31241,45741,45733,85533,855WorldWorld

17,90917,90910,90010,9007,0097,00912,65712,6577,4197,4195,2385,23812,80512,8057,7347,7345,0715,071EUEU

25,24525,24516,89616,8968,3498,34922,11122,11114,87314,8737,2377,23720,64320,64313,05713,0577,5867,586USUS

21,94521,94516,23016,2305,7145,71413,84413,84410,03010,0303,8143,8149,8769,8766,6406,6403,2363,236NIESNIES

23,42223,42212,75512,75510,66710,66715,50715,5078,6798,6796,8286,82810,28510,2856,2896,2894,5364,536ASEAN 6ASEAN 6

32,61732,61717,41117,41115,20615,2061,6021,6028,1568,1567,9067,9064,8164,8166,2046,2042,0442,044China+HKChina+HK

1,2141,214723723491491496496234234262262548548247247301301IndiaIndia

TotalTotalTradeTrade

ExportExportImportImportTotalTotalTradeTrade

ExportExportImportImportTotal Total TradeTrade

ExportExportImportImport

200720072002200219901990

Japan's Trade with Major Economies (in Million Yen)Japan's Trade with Major Economies (in Million Yen)

• The share of Japanese import from and export to India, out of Japan’s total import and export, is very small compared with other countries over the last five years (2002-2007)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2000

2001

2002

2003

2004

2005

2006

2007

Year

In Y

en T

rillio

n

Japan-India Export

Japan-India Import

Total India-JapanTrade

JapanJapan’’s Trade with Indias Trade with India20002000--20072007

Trade and Production LinkageTrade and Production Linkage

108.5108.535.835.872.772.715.215.26.506.508.78.7Rest of WorldRest of World

46.4046.4021.2021.2025.2025.2012.812.85.205.207.607.60EUEU

24.1024.1017.1017.107.007.005.35.32.902.902.402.40USUS

9.009.002.802.806.206.201.11.10.400.400.700.70NIESNIES

17.0017.006.806.8010.2010.202.32.31.001.001.301.30ASEAN 6ASEAN 6

21.0021.0011.0011.0010.0010.000.30.30.200.200.100.10China +HKChina +HK

6.506.502.902.903.603.603.53.51.801.801.701.70JapanJapan

Total TradeTotal TradeExportExportImportImportTotal TradeTotal TradeExportExportImportImport

2005200519901990

India's Trade with Major Economies (in $ billion)India's Trade with Major Economies (in $ billion)

• India’s trade with Japan doubled from 1990 to 2005, but is still low compared with India’s major trading partners such EU, US, China and ASEAN

IndiaIndia’’s Trade with Japans Trade with Japan20002000--20062006

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2000 2001 2002 2003 2004 2005 2006

Year

In U

S M

illio

n

India-JapanExportIndia-JapanImportTotal India-JapanTrade

4. Trade and Production Linkage4. Trade and Production LinkageJapanJapan--India Trade Potential India Trade Potential •• Large trade inefficiency due to Large trade inefficiency due to ‘‘behind the borderbehind the border’’

constraints (constraints (KalirajanKalirajan and Bhattacharya, 2008)and Bhattacharya, 2008)-- At aggregate level India achieved 60% of its potential, while At aggregate level India achieved 60% of its potential, while Japan achieved 64 %. Japan achieved 64 %. -- Inefficiency index varied across 10 commodity groups, Inefficiency index varied across 10 commodity groups, ranging 36ranging 36--70% for India and 4370% for India and 43--74% for Japan74% for Japan

•• Potential impact of a JapanPotential impact of a Japan--India FTAIndia FTA-- JapanJapan’’s export to India would rise by 2.5 percent although s export to India would rise by 2.5 percent although IndiaIndia’’s exports to Japan would expand by only 0.3 percent. s exports to Japan would expand by only 0.3 percent. -- As JapanAs Japan’’s average tariff is quite low compared to that of s average tariff is quite low compared to that of India, Japan will benefit much more than India. India, Japan will benefit much more than India. -- So a proposed FTA, if only tariffSo a proposed FTA, if only tariff--based, would not have based, would not have significant impact, particularly on India. significant impact, particularly on India. -- It should involve nonIt should involve non--tariff issuestariff issues

5. FDI, Financing and ODA5. FDI, Financing and ODAJapanJapan--India FDI India FDI •• JapanJapan’’s FDI in India is limiteds FDI in India is limited

-- Japan invests largely in the US, Europe and East Asia Japan invests largely in the US, Europe and East Asia -- India attracts FDI from Europe, US and nonIndia attracts FDI from Europe, US and non--Japan East AsiaJapan East Asia-- JapanJapan’’s FDI is in exports FDI is in export--oriented industriesoriented industries

•• Potential for greater FDIPotential for greater FDI-- Global investors view India as the worldGlobal investors view India as the world’’s business hub with s business hub with longerlonger--term market potential term market potential -- IndiaIndia’’s FDI policies are more attractive than Chinas FDI policies are more attractive than China’’s in many s in many ways, through India lacks marketing/soft skills to translate ways, through India lacks marketing/soft skills to translate these into actual investments. these into actual investments. -- India is rated as the third most favored FDI destination, next India is rated as the third most favored FDI destination, next only to China and United States by a recent confidence survey only to China and United States by a recent confidence survey done by AT Kearneydone by AT Kearney

5. FDI, Financing and ODA5. FDI, Financing and ODA

Distribution of Cumulative FDI Outflows and Inflows for India

10046,27710011506World Total

52.124,104606901ROW

3.41,5846.9790ASEAN 10

5.52,5507.6873Asian NIEs-4

20.29,33712.41,432EU-15

13.26,11213.11507US

5.62,59003Japan

(%)Million US$(%)Million US$

(1991–2005)(1996–2006)

Cumulative FDI InflowsCumulative FDI Outflows

India’s FDI Outflows to or Inflows from:

JapanJapan’’s FDI in Indias FDI in IndiaNo of Japanese Business Establishment in India

2003-2007

2001

2002

2003

2004

2005

2006

2007

2008

No. o

f Bus

ines

s Es

tabl

ishm

ent

050100150200250300350400450500

• Japanese Joint Ventures in India are contributing to India’s export to third countries. Examples include Maruti Suzuki and Honda Group (Hero Honda and HMSI).

• There has been a qualitative change in the strategies of Japanese companies, and that some leading Japanese companies have started considering India as a future export hub of their products. These trends are expected to facilitate India’s export in the future.

Japanese Overseas Development AssistanceJapanese Overseas Development Assistance•• India is JapanIndia is Japan’’s top recipient of ODA s top recipient of ODA •• Focus of JapanFocus of Japan’’s ODA to India :s ODA to India :

-- development of physical infrastructure, development of physical infrastructure, mainly in the areas of power and transportationmainly in the areas of power and transportation-- poverty reduction through agricultural and poverty reduction through agricultural and rural development;rural development;-- environmental protection through environmental protection through afforestationafforestation and improvement of water quality;and improvement of water quality;-- improvements in health and medical careimprovements in health and medical care

5. FDI, Financing and ODA5. FDI, Financing and ODA

JapanJapan--India Comprehensive Economic PartnershipIndia Comprehensive Economic Partnership• Japan is advancing negotiations on a traditional FTA

with India to eliminate tariffs• A (Comprehensive) Economic Partnership Agreement

(EPA/CEPA) may cover: (i) trade in goods, (ii) trade in services, (iii) measures for trade promotion, (iv) promotion, facilitationand liberalization of investment flows, and (v) measures for promoting economic cooperation in identified sectors.

• “Japan-India Special Economic Partnership” (2006):- the development of infrastructure and promotion of manufacturing, trade and investment; - human resource development for promotion of manufacturing; - science and technology initiative; - people-to-people exchanges; and - regional and multilateral cooperation

6. Japan6. Japan--India Bilateral Economic India Bilateral Economic PartnershipPartnership

6. Japan6. Japan--India Bilateral Economic India Bilateral Economic PartnershipPartnership

Barriers to Deep Economic CooperationBarriers to Deep Economic Cooperation•• Poor governance and red tape: the differences in Poor governance and red tape: the differences in

business practices, and environment especially in the business practices, and environment especially in the lack of clarity in the policy guidelines lack of clarity in the policy guidelines

•• Weak infrastructure: overall infrastructure facilities Weak infrastructure: overall infrastructure facilities are still lacking in India. Power facilities are are still lacking in India. Power facilities are considered below average.considered below average.

•• Rigid labor law: revision of the Labor Act Rigid labor law: revision of the Labor Act •• Language barrier: Language barrier: Language is a major barrier and Language is a major barrier and

restricts easy interaction between business restricts easy interaction between business representatives of Japan and Indiarepresentatives of Japan and India

Differing Levels of Openness and Differing Levels of Openness and MarketMarket--OrientationOrientation

/b/b646432329.59.5ASEANASEAN

121213134.24.2New ZealandNew Zealand

2212124.24.2AustraliaAustralia

3535414115.715.7IndiaIndia

3535222210.410.4ChinaChina

222212127.27.2KoreaKorea

232311113.53.5JapanJapan

Time to Start a Business

(No. of days)

Time for Import(No. of days)

Ave. Import Tariff Rates/a

(Manufactures, in %)

/a MFN rate; data as of 2005 except for Korea (2004) and Cambodia (2003)./b Average for ASEAN, excluding Lao PDR is 50.Source: Compiled from UNCTAD and World Bank.

7. Regional and Global Dimensions 7. Regional and Global Dimensions of Japanof Japan--India PartnershipIndia Partnership

Regional CooperationRegional Cooperation•• India is beginning to join East AsiaIndia is beginning to join East Asia’’s production s production

networks through networks through FTAsFTAs with Thailand, ASEAN, etc. with Thailand, ASEAN, etc. •• JapanJapan--India FTA is expected to provide a basic ground India FTA is expected to provide a basic ground

for strengthening regional economic cooperation in for strengthening regional economic cooperation in East Asia, particularly in forming an East AsiaEast Asia, particularly in forming an East Asia--wide wide FTA and EAS cooperation FTA and EAS cooperation

•• India sees this growing engagement with East Asia as India sees this growing engagement with East Asia as a building block for an Asian economic communitya building block for an Asian economic community

•• JapanJapan--India economic partnership can facilitate and India economic partnership can facilitate and enhance crossenhance cross--subregionalsubregional cooperation between East cooperation between East Asia and South Asia Asia and South Asia

•• IndiaIndia’’s role in strengthening South Asian regional s role in strengthening South Asian regional cooperation, through e.g., SAARC is vitalcooperation, through e.g., SAARC is vital

ASEAN + 1 CooperationASEAN + 1 Cooperation

ASEAN + 3 CooperationASEAN + 3 Cooperation

East Asia Summit (ASEAN + 6) East Asia Summit (ASEAN + 6) CooperationCooperation

7. Regional and Global Dimensions 7. Regional and Global Dimensions of Japanof Japan--India PartnershipIndia Partnership

Global CooperationGlobal Cooperation•• Japan, as an OECD and G8 member, can play a key Japan, as an OECD and G8 member, can play a key

role in involving a major emerging economy like India role in involving a major emerging economy like India to address key global issues, such as, (i) environmental to address key global issues, such as, (i) environmental protection and climate change, (ii) food security, (iii) protection and climate change, (ii) food security, (iii) energy security, and (iv) global governance. energy security, and (iv) global governance.

•• Strong JapanStrong Japan--India partnership can facilitate speedy India partnership can facilitate speedy formulation and implementation of polices to meet the formulation and implementation of polices to meet the key global challenges, and raise the voice of Asia in key global challenges, and raise the voice of Asia in global forums. global forums.

•• Japanese technologies can contribute to IndiaJapanese technologies can contribute to India’’s (i) s (i) energy efficiency and security, (ii) environmental energy efficiency and security, (ii) environmental improvement, (iii) mitigation of climate change, and improvement, (iii) mitigation of climate change, and (iv) sustainable growth and development(iv) sustainable growth and development

8. Future Prospect8. Future Prospect•• Maximize Economic ComplementaritiesMaximize Economic Complementarities

-- Factor endowment, demography, capabilities and Factor endowment, demography, capabilities and specializationsspecializations

•• Enhance Private Sector InvestmentEnhance Private Sector Investment-- Big potential in IndiaBig potential in India’’s growing integration with s growing integration with East Asia, a shift to tradeEast Asia, a shift to trade--oriented manufacturing, oriented manufacturing, participation in East Asiaparticipation in East Asia’’s production networks s production networks and supply chains and supply chains -- Six core areas of investment opportunity for Six core areas of investment opportunity for Japanese firms in India: automobiles and Japanese firms in India: automobiles and motorcycles; infrastructure building; raw materials motorcycles; infrastructure building; raw materials (chemical and steel); biotechnology, food (chemical and steel); biotechnology, food processing and services (hotel, tourism, retail and processing and services (hotel, tourism, retail and transportation).transportation).

8. Future Prospect8. Future Prospect•• Meeting SocioMeeting Socio--cultural Challengescultural Challenges

-- Japan facing the challenge of aging population and Japan facing the challenge of aging population and shrinking market. shrinking market. -- Setting up of a Japan industrial and residential village Setting up of a Japan industrial and residential village in India with heath care and care giving servicesin India with heath care and care giving services

•• Comprehensive Economic Partnership and Comprehensive Economic Partnership and CooperationCooperation-- JapanJapan--India partnership should go beyond the India partnership should go beyond the liberalization of goods tradeliberalization of goods trade-- It should include: Singapore issues (trade facilitation, It should include: Singapore issues (trade facilitation, investment, competition policy and procurement), and investment, competition policy and procurement), and other types of cooperation (such as SME promotion, IT other types of cooperation (such as SME promotion, IT development, development, science/engineering technology, energy, science/engineering technology, energy, environmental protection, and peopleenvironmental protection, and people--toto--people people exchanges)exchanges)

Thank youThank youFor more information:For more information:

Dr. Masahiro Kawai Dr. Masahiro Kawai Dean Dean

Asian Development Bank InstituteAsian Development Bank Institutemkawai@adbi.org

+81 3 3593 5527http://aric.adb.org

www.adbi.org