Even as the friendship between Shinzo Abe and Narendra Modi blossomed during the new Indian leader’s first foreign trip, Japan Inc refused to get misty-eyed, wary of the pitfalls of doing business on the sub-continent. A five-day tour that began with a bear hug and a day of sightseeing in the ancient Japanese capital of Kyoto worked itself up through a crescendo of mutual compliments that culminated in Tokyo’s pledge to spend USD 34 billion in India over the next five years.
Companies love the idea of India, with its huge untapped market and its vast, cheap workforce. But they know there are potential problems; Japanese suitors have stumbled more than once before. ”India’s very weak infrastructure adds to the cost of making and moving things there,” said Takashi Kodama, head of Asian economic research at Daiwa Institute of Research. ”Unless you resolve that, the current hopes for India that the world has cannot spark an investment boom,” he said.
On top of dodgy roads, ramshackle railways and other weak infrastructure, there are complex local customs for multi-national firms looking for somewhere other than China to set up shop. Unexpected taxes and economic policy changes in India have also discouraged investors, who want lower costs, high growth and predictability. Despite its broadly comparable population, India is home to just over 1,000 Japanese firms, about five percent of the total operating in China.
To be sure, Japanese businesses agree that India has enormous potential as the populous democracy enjoys steady growth, an expanding middle class and modernisation that is boosting demand for infrastructure, such as trains, sewerage and electricity. Japanese firms can also use India as a hub to export to regions west of the Indian Ocean, such as Africa and the Middle East. Economic liberal Modi knows this and was in Tokyo to pitch for investment.
“Businesses and industries need stability and a growth environment. India has become a country that provides both,” Modi told businesses in Japan last week on his first tour since coming to power. ”Tell me what you need for the business environment. India will deliver it,” he said.
A string of Japanese firms have recently committed to fresh Indian investments, including major electronics parts maker Nidec, which has decided to spend roughly USD 1 billion in India in the next seven to eight years.
But there have been costly failures, among them pharmaceutical maker Daiichi Sankyo’s USD 4.6 billion purchase of Indian giant Ranbaxy in 2008. That went sour when US regulators banned imports of its drugs over quality concerns, dealing a huge blow to Daiichi Sankyo’s bottom line and leading to a cut-price sale of the unit. Fellow drugmaker Eisai launched a production and research hub in a special economic zone with tax incentives in 2009.
But India changed its policy and slapped an alternative tax on the company in 2011, said Sayoko Sasaki, Eisai corporate officer. ”It is a big market with a lot of opportunities. But when it comes to tax rules, it has to be predictable,” she told AFP. ”We hope India’s investment environment will continue to improve,” she said.
Among winners in India, small-car specialist Suzuki Motors has prospered there for three decades, having entered the market well before the nation became a hot prospect, mostly serving domestic motorists. But even Suzuki has suffered from bouts of labour unrest, including a 2012 riot that resulted in the death of a personnel manager in India. For India’s part, Japan is a less complicated partner than other nearby countries that have the cash it needs for investment, say analysts.
“India wants money for infrastructure. It can ask China, which is eager and willing to give but might also try to use it as an opportunity to exert its political influence,” said Kodama of Daiwa Institute of Research. ”By comparison, Japanese money would come with fewer strings attached,” he said. Abe’s financial targets affirm Japan and India’s commitment to their partnership, said Shotaro Kumagai, economist at Japan Research Institute.
“I would say India regards both China and Japan as important partners, rather than comparing and trying to pick one or the other,” he said. But the world is waiting to see whether Modi can turn his nation’s good prospects into reality, Kodama said. ”If Modi delivers on his promises and buoys the economy, maybe more investors will move in,” he said. ”There are lot of hopes for India. But they are only hopes. We are yet to see concrete policies.”