New Era Of India-Japan Relations: Polarizing Counter-Weight To China And Reinforcing IPEF To Outbid RCEP – Analysis

Hitherto, till Mr Shinzo Abe became Japan’s Prime Minister for a second term, India-Japan relations were confined to economic cooperation on bilateral issues. Given the bonhomie between the two Prime Ministers, the spurred relations to reach deeper on the geopolitical level and to downplay China’s global influence.

Many political and economic analysts observed the old approach of India-Japan relations in retreat and the new relation emerged to rejig India as a surrogate for Japan to outsmart China’s confluence of political and economic power, given the big threat to Taiwan and closer ties with Russia during the Ukraine invasion.

The last visit of Japanese Prime Minister Mr Fumio Kishida in March 2022 demonstrated the new vision of India-Japan relations. He is known as the Shinzo Abe ‘s handpicked successor. His rise to the frontline was his vow to counter China’s growing influence, by closely working with like-minded democracies such as India, USA, Australia and the UK.

As India and Japan are moving to hold two important global events in 2023, the G-20 summit in India and the G-7 summit in Japan, the two nations joint role has increased in counterbalancing China’s hegemony mandate. In addition, the growing shared visions and interests in the Indo Pacific region manifest the two nations shift to multilateral relations from bilateral issues.

Notwithstanding, why has Japanese investment nosedived in India In 2021-22? Japanese investment in India fell by 23.4 percent. In contrast, there was a marginal drop in total foreign investment in India. The trigger in FDI continued even during COVID pandemic. They were driven by Singapore, USA, Netherland and Mauritius. In other words, India continued to be the preferred destination for foreign investment by the global majors.

Foreign investment is crucial for India. Japanese Investment has been the core issue for strong economic relations between the two nations. It is known for placing India in the global map for automobile industry and transforming Indian manufacturing in technology oriented and supply chain dynamism. Against these backdrops, flagging Japanese investment left Indian corporate in a morose state.

Unperturbed US investors splurged in investment, which increased by over 290 percent in 2020-21, even during the peak of COVID 19 pandemic. This was followed by other major foreign investors, such as Singapore, Netherlands and UK.

More astonishing is that a survey by JETRO, the trusted Japanese survey organization, unveiled an upbeat mood of the Japanese investors to expand their business operations in India. According to the survey, a large number of Japanese investors in India (61.5 percent) expected profit in 2021, even though the nation was crippled by COVID19. The growth margin of profit was as high as 59.6 percent. In addition, India topped among the surveyed Japanese investors in ASEAN and Asia for their business expansion within the next 1-2 years. To the surprise, China fell to 10th rank in business expansion, according to the survey.

There could be two reasons for Japanese investment shrinking in India, according to the analysts. First, it was India’s withdrawal from RCEP and second, Japanese lagging in digitization.

RCEP was a boost to the Japanese investors. Nearly, half of Japanese exports go to RCEP. Given the duty free access, Japanese were expecting to increase investment in India, in lure of a big domestic market. Already a number of Japanese subsidiaries in ASEAN established close tie up with their counterparts in India under India-ASEAN FTA. With India suddenly withdrawing from RCEP at the last moment, Japanese investors had second thought in investing in India.

India witnessed a major structural changes in foreign investment during the COVID 19 pandemic. Growth of the digital economy emerged as the main attraction for foreign investment in India. US investors alone invested US$13 billion in 2020-21.

Demand for digital services increased rapidly during COVID 19 lockdown to reduce the human contract. India is the second largest internet connection nation in the world. With nearly half a billion internet connections and the largest smartphone users, India has emerged a global leader for digital economy.

Globally, Japanese rallied much behind of developed nations, as well as India, in digital transformation, according to a McKinsey survey. The headwinds, which restricted Japanese digital transformation, were lack of digital talents and understanding among the senior corporate managers, the survey said.

In recent years, both Japan and India relation has been growing with shared vision and interests in Indo Pacific area . This led the birth of IPEF (Indo-Pacific Economic Framework) . It is an attempt by USA to reinstate its influence in Indo-Pacific region. IPEF is a further attempt for reinforcing economic influence in Asia, which remained under China’s clout so far. 13 members of IPEF consist of larger number of members from South East Asia. There were 9 members from South East Asia in IPEF.

IPEF accounts for 40 percent of world trade and 60 percent of global population. IPEF skipped FTA for economic arrangement. This raised questions over the guaranteed increased market accessibility. Nevertheless, with the absence of China, the trajectory of decision making will be USA oriented. With the launching of IPEF, India re-emerged a doyen to challenge China dominated RCEP.

Even though, RCEP accounts for nearly half of Japan’s trade, Japan is reluctant to move forward with RCEP for its increased share in global trade. Japanese incentivisation for de-coupling from China and pushing IPEF a counterweight to China, have been hailed by India. Stepping in the same shoes, India is on toe to reduce dependence on imports from China. During the first nine months of 2022-23 (April-November), India’s import dependence on China for electronic components, the major area for dependence, plunged to 34 percent from 49 percent in 2021-022 ( April-March).

In summing up, the common visions and interests of India and Japan pulled both nations into a new dimension of relation, polarizing to downplay China’s influence in Asia.