Giving the rise in India’s trade relation with China, Japan was outplayed as a major trading partner of India. Three decades ago, in 2001-2002, Japan was the 5th largest trading partner of India and China logged at the 10th rank. China toppled Japan, given India increasing dependence on China for larger imports, in the wake of India’s shifting to manufacture of electronic and tech-oriented industries. In 2023-24, Japan slipped to 14th rank and China leaped as top trading partner.

This demonstrates that with the rapid growth in Indian economy and structural changes in domestic manufacturing, role of Japan in trading with India tapered . This left India Japan economic relations dependent more on Japanese investment and ODA loans.

During Shinzo Abe’s premiership, which stretched nearly for 8 years, the longest period in Japanese history, India-Japan relation witnessed a big growth in the economy through Japanese investment and Japanese financial support for infrastructure development in the country. Induction of Delhi Metro and the forthcoming bullet train between Mumbai and Ahmedabad are the cases in point for Japanese support.

During Shinzo Abe period, during 2012 to 2020, Japanese FDI in India sparked to over US$ 5.7 billion in 2016 , from a mere US$ 1.9 billion in 2012 and hovered around an annual average of US 2.5 billion in the rest of the 4 years till 2020.

This went reverse during Prime Ministership of Mr Fumio Kishida. Japanese investment in India plunged to US$ 1.9 billion in 2020-21 (Kishida period) from US$ 3.2 billion in 2019-20 ( Abe period) and further dipped to US$ 1.7 billion in 2022-23, before making a leap in 2023-24. This demonstrates that the leadership of Prime Minister Fumio Kishida could not cope with the legacy of Prime Minister Shinzo Abe, who was a game changer in India-Japan partnership.

Eyebrows were raised over the complex situations of Japanese investment in Asia in 2023. The significant shift was from China. For the first time Japanese investment in India outplayed investment in China in 2023 and India emerged as the second biggest receiver of Japanese investment after Singapore in Asia. Hitherto, China has been either top or second biggest receiver of Japanese investment in Asia for decades together.

Further, ASEAN, which used to be preferred destination for Japanese investors in Asia against India, fell prey to Japanese downswing in outward investment in 2023. Japanese investment in ASEAN declined by 2.9 percent in 2023, in contrast to spike in investment in India by 23.1 percent. This is despite India withdrawing from RCEP (Regional Comprehensive Economic Partnership) and ASEAN being the major stakeholder.

Structurally, Japanese investors poured more money in non-manufacturing, service sectors, in overseas investment. Nearly 65 percent of Japanese outward investment was in non-manufacturing, and 35 percent in manufacturing in 2023. Wholesale, retail, finance and insurance were the major receivers of Japanese investment abroad. Together, they accounted for more than one third of non-manufacturing investment (36.8 percent in 2023).

But, the stringent regulations in retail trading, banking and insurances debarred Japanese investors to invest in India. For example, with the changing in the government in 2014 – from Congress to BJP - not a single FDI was approved in multi-brand retail.

In manufacturing, the major investment areas were in chemicals and pharmaceuticals, transport equipments and general machinery. Chemical and pharmaceutical were the trigger for Japanese investment abroad since past 3 years.

The global change in FDI strategy imparted a major impact on Japanese investment abroad as well as in India. Hitherto, growth in global FDI has been aligning with GVC (global value chain). Nearly, one third of global FDI was flowing in GVC and China has been one of the biggest receivers of FDI. With the breakdown of COVID 19 and increase in geopolitical tensions, the link between FDI flow and GVC was disrupted, according to a UNTACTD report, entitled “Global economic factoring and shifting investment pattern”.

The report highlighted five factors for change in the strategy of FDI flow. One of them and the most important was shift from manufacturing to service sector. FDI in manufacturing stagnated for two decades, before experiencing a significant downturn.

Eventually, service sector emerged as the 2nd biggest attraction of Japanese investment in India. During 2000 to 2023, it accounted for 14 percent of total Japanese investment and inches near to automobile, which accounted for 17 percent.

In summing up, the sudden leap in Japanese investment in India in 2023, after a deplorable downturn for 4 years, underscores a significant change in the Japanese FDI strategy in India. The significant move was MOU with Rapidus Corporation, Japan in July 2023 for manufacture of semiconductor chips. It was formed with the backing of Japanese MNCs, like Sony, Toyota, Kioxia, NEC, NTT and MUFG Bank. It will likely give a new lease of life to Japanese investment in India. (IPA Service)