Japan Infrastructure Deal to Unlock Further Opportunities in India

September 4, 2014 Posted by India Briefing Reading Time: 4 minutes

Op-Ed Commentary: Samuel Wrest

Over the weekend, Narendra Modi made his first major state visit to Japan’s former imperial city of Kyoto for summit talks with Prime Minister Shinzo Abe. The subject of the two leaders’ meeting was multifarious and included discussion on the strengthening of security ties, nuclear energy cooperation and the easing of restrictions on exports. Perhaps most important, however, was Tokyo’s pledge to help directly fund projects to improve India’s infrastructure.

Over the next five years, Japan has promised it will invest approximately US$35 billion into several next-generation infrastructure projects in India, including public transportation and smart cities. India’s poor infrastructure is commonly identified as a factor hindering greater foreign direct investment (FDI). This has allowed other Asian countries with existing infrastructure, such as Singapore and Malaysia, to become the preferred destinations for certain types of FDI. Japan’s funding will certainly go some way towards ending this disadvantage, and will help steer India in the right direction to maximize its vast investment potential.

However, Japanese FDI into India is in itself not a new story. Indeed, bilateral relations between Asia’s second and third largest economies have long been strong, with Japan frequently being Asia’s greatest investor in India since the early 90s. What sets this particular agreement apart from others is firstly, the promise of where the money will be invested – into India’s outdated infrastructure – and secondly, the prime mover behind it.

The relationship between Narendra Modi and Shinzo Abe predates Modi’s appointment as India’s prime minister in May. Modi initially visited the Japanese leader during the latter’s first term in office in 2007, and once again whilst Abe was opposition leader in 2012. Good relations between the two have been the cause of much conjecture and purportedly stem from a shared opposition to Chinese expansionism; for Modi, this concerns the border between China and India, and for Abe, Japan’s protracted jurisdictional dispute with China in the East China Sea.

It therefore comes as little surprise that many reports have interpreted Modi’s recent talks with Shinzo Abe as an attempt to blunt China’s ever-increasing economic, political and military power in the Asia-Pacific. On Monday, Modi seemingly added fuel to such speculation, declaring that some countries are still rooted in 18th century ideas of governance and territory encroachment. Whilst not singling out any one country, commentators have been quick to conclude that the Indian prime minister was referring to China.

However, recent talks between the two leaders and the resulting agreement should not so readily be seen as the start of a united front against China. Chinese president Xi Jinping’s planned visit to India later this month is a clear indication that relations between the two Asian superpowers are still healthy, and further lends credence to the idea that India is aiming to build bilateral relations with both Japan and China. What can concretely be taken from Narendra Modi’s talks with Shinzo Abe is the imminent arrival of some much-needed funding from Japan into India’s infrastructure, which will undoubtedly lead to the country becoming an even more attractive destination for investment.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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