Many centuries ago, India and Japan had begun exchange between them, when Buddhism was introduced to Japan via the Korean Peninsula. However, Direct exchange, began only in the Meiji era (1868-1912), when Japan started with its process of modernization. From then on, bilateral relations developed around Japanese purchases of cotton. India's friendship with Japan after the war helped a great deal when Japan returned to the international arena.
Since 1952, Japan and India have maintained diplomatic relations and enjoyed cordial relations based on trade and economic and technical cooperation. After the WW II, the focus of Japan's economic relations with India switched from the prewar import of cotton to the import of iron ore. Relations developed steadily as Japan's imports of ore and exports of manufactured products increased. Following Japanese Prime Minister Nobusuke Kishi's visit to India in 1957, yen loans to India began in 1958, as the first loan aid extended by Japan.
In 1958 Japan participated in the Consortium Meeting of India's creditor countries hosted by the World Bank and embarked on the full-scale assistance to India that has continued to the present. Since fiscal 1986 Japan has been India's largest aid donor. Japan and India have traditionally enjoyed cordial and friendly relations and the feelings of Indian people towards Japan have been good. The number of Jaanese nationals residing in India was 2,050 (Oct., 1999) while the number of Indian nationals residing in Japan: 9,067 (Dec., 1999) is an indicator of cooperation between the two nations. Bilateral relations between two countries faced delicate situation after India conducted underground nuclear tests in May 1998. Japan also took a series of measures in accordance with Japan's ODA Charter. But both sides have been making efforts to understand each other through dialogue the important partners in Asia.
Economic Cooperation between the two nations has been buoyant with Japan's total loans to India amounting to $4,239.0 million in 2004, grant aid were of the order of $ 399.2 million, while technical cooperation totalled to an amount of $ 179.5 million.
Traditionally, Japan has been the second largest destination of Indian exports (major exports include gems, marine products, iron ore, and cotton yarn). India is also a major importer of goods from Japan, and its importance has been growing in recent years (major imports include machinery, plant-related products, transport equipment, and electronic machinery).
Agreement on Commerce Between Japan and India (1958) was one of the remarkable treaties signed by the two nations to strengthen their trade relations. Japan-India Trade Talks on overall bilateral trade and investment began in 1978. Since then many such talks have taken place. Besides, private sector forum such as 'Joint Meetings of the Japan-India Business Cooperation Committee', which holds annual joint meetings, promotes private-sector bilateral cooperation in various economic fields as well as mutual understanding.
India is a first country to which Japan extended the first Yen Loan and India has been one of the largest recipients of Japan's ODA. Japan has long been actively providing assistance to India, primarily in the form of Official Development Assistance loans, for upgrading of economic infrastructure, alleviation of poverty through public health and medical care, agricultural and rural development and population and AIDS countermeasures, support for small business and for environmental conservation.
India has actively pursued economic liberalization and market oriented economy since 1991. With India's push towards greater economic liberalization policies, Japanese corporations' interest in India has risen, and private-sector investment has increased dramatically and it is expected to rise further in future.
Closely linked to the prospect of FDI is the improvement of India's economic infrastructure. In this respect too Japan has been helping India since 1958 through its Official Development Assistance (ODA) programme. ODA is provided to infrastructural sectors like telecommunication, power and transport. Of course, over the years ODA has expanded beyond infrastructure. Recent ODA packages include just completed Delhi Metro Railway, Yamuna Action Plan and some projects in the Power sector. Japan's assistance under ODA since fiscal 1990-91 to 2001-02 cumulates at ¥ 977.14 bn.
Majority of the Japanese companies surveyed said that they are making profits and are "positively considering further expansion of their operations". However, to many of them, the inhibiting factors are differences in business practices, environment and culture etc but at the same time they are aware of India's huge market potential, especially in IT and IT-related.
Japanese investors feel that availability of skilled manpower is a major advantage enjoyed by India in attracting foreign investment into India but at the same time a healthy market growth is also equally important.
However, there is a lack of clarity in the policy guidelines. Also, most of Japanese investors feel that ground level hassles like labour laws, taxes, legal and regulatory framework are high in India. They consider procedural delays a major discouraging factor for potential investors. The infrastructure forms the backbone of development of any country. According to the majority of the Japanese investors, overall infrastructure facilities are lacking in India. To attract Japanese investment, Indian transport infrastructure needs improvement; power facilities are below average. The telecommunication facilities are however rated as "average". Japanese investment in India is driven by Indian domestic demand, and that for reasons such as geographical factors, high tariffs and other regulations, it would be difficult to expect the same level of growth as in Sino-Japanese trade." The sectors that attract Japanese investment include transportation (28 percent); telecommunications (18%), fuel (13.5%), chemicals (12.17 percent) and trading (6 percent).
Although investments in IT and automobile industries are increasing, thanks to deregulation, further economic reforms and deregulation are required to attract foreign investment into India. "Specifically, the retail and real estate industries are still closed to foreign investors, and respective deregulation measures are urgently needed. It is absolutely necessary for India to take steps to strengthen the competitiveness of Indian products and to improve the comprehensive productivity through revision of the Labour Act, improvement of infrastructure and individual private companies, of self-help improvement.
For Indian investors, investing in Japan is pretty alluring. Japan, the business hub of Asia's growing economies is rated as world's second largest market. Apart from highly skilled human resources, Japan offers innovative technologies. So far as infrastructure back-up is concerned, the transportation network is rated as one world's bests. Other advantages to work with Japan include world-class information and communication technology ICT) facility, a highly reliable logistic infrastructure and other investor-friendly facilities. Responding to economic globalization, commercial laws and major elements of country's economic legal framework have been reformed by the Japanese government.
It is significant to note that many a foreign companies doing businesses in Japan have posted higher profit even than Japanese companies themselves. Japan has identified four major areas of foreign investment, namely, ICT, Biotechnology, Medical Care and Environment.
Indo-Japan bilateral development cooperation has seen remarkable and progressive expansion in recent years. The Government of Japan provided Yen 1250.04 million for projects in FY 2003, in which India became the largest recipient of the Japanese ODA. Till the FY 2003-04, Japan has provided approximately Yen 2193 billion on commitment basis as ODA to India.Japan plans to start exploring for natural gas on its own in the area possibly in the summer months (June-August) and embark as early as next year on joint exploitation of natural gas led by the private sector, according to government sources. The Japanese government will start selecting private contractors for drilling and development of natural gas in the area. Natural gas from the field will be supplied to India via pipeline and be exported to Japan as well.
Japan wants to diversify its sources of natural gas as it currently relies on imports for 97 percent of its needs with Indonesia, Malaysia and Australia being the major suppliers. The natural gas deal is also aimed at strengthening bilateral ties as Japan's ruling party hopes to use its strong partnership with India for checking China's increasing presence in western Asia. The deal also reflects a tie-up between Japan and India in their bids to become permanent members of the United Nations Security Council.
While Japan is implementing structural economic reforms, India is in the process basic economic reforms. The Japan-India Joint Declaration of December 10, 2001 has set the ball rolling for things to shape up in Indo-Japanese relationship in the 21st century. To raise the bilateral relationship to a " qualitatively new level" is the ultimate of the Joint Declaration. Stronger Indo-Japanese bilateral relations would also mean a more stable and prosperous Asia. Broader and deeper economic relations between the countries would form the cornerstone of this bilateral relationship.
Both the countries are strongly committed to an "open and non-discriminatory rule-based multilateral trading system". Indo-Japanese trade relations and economic cooperation is going stronger by the years, though, if compared with neighboring China's trade with Japan, India's share in Japan's total trade does not give any impressive look. So also in the field of foreign direct investment. Japan, which is the fourth largest investor in India itself, is not happy with this rate. India has to do a lot to create an investor-friendly environment through speedier economic reforms and freeing the country from clutches of deregulation at the earliest.
Recently, Indian commerce minister Kamal Nath has pointed out that the emphasis of India-Japan bilateral trade should be foreign direct investment-based and not official development assistance (ODA)-based.
He said, "India is one of the largest ODA recipients from Japan. However, in the changed context of our desire for seeking a new economic partnership, it is important that we shift the emphasis of India-Japan relationship from ODA-based to FDI-based," approvals of Japanese FDI in India during the period 1991-2004 have been in the order of $3.2 billion, which was around 4.8 per cent of total Indian approvals for all FDI. But of this, the actual inflow of investment from Japan was around $1.8 billion. He said Japanese investments in India are very low despite a number of successful Indo-Japan ventures such as Suzuki-Maruti, Hero-Honda, Toyota-Kirloskar.
Presently, Japan is the fifth major trading partner of India having a share of 3.1% in India's total exports and imports2003-04 However, the figure is not very encouraging; it was only $4 billion, which was traded between the two nations during 2003-04, a growth of 18 per cent over what it was in 2002-03. there is an immense scope for increasing the trade between the tow nations in the coming years.
Another issue, which binds India and Japan together, is getting permanent membership in the UN Security Council. In his visit to New Delhi, in late April this year, Japanese Prime Minister Junichiro Koizumi may urge New Delhi to work out a common bilateral approach for securing permanent membership in the UN Security Council. With China clearly emerging as a stumbling block for Japan's entry into the elite club, Japan feels it is important to make a concerted effort with India.
The Japanese PM Junichiro Koizumi on his visit to India on 29th April 2005, addressed the Indian business community to tap the tremendous opportunities between the two countries. He charted a three-point agenda to strengthen bilateral relations, regional cooperation and cooperation at global level.
Meanwhile, Japanese PM has agreed to give financial support in build $ 5 billion rail corridor between New Delhi and Mumbai and Delhi and Hawrah to speed up infrastructure in India. The corridor will allow multi-modal, high axle load freight trains, with a fully computerized traffic control, to run from one end of the country to another. The project will be under Japan’s “Special Terms for Economic Partnership” (STEP) scheme.
The Indian and Japanese PM met on Friday and agreed to set up a joint Indo-Japan study group to make economic relations stronger. The Japanese premier said that India is third important destination for Japan in Asia after China and Korea. He added, “ I hope other Japanese companies will share the success of Suzuki and other companies that set up shop in India.” Indian commerce minister, Kamal Nath, said India and Japan could easily reach a trade level of $ 10 billion within three years, though trade has been stagnating at $ 4 billion annually for the past 8 years.
Japan wants India to be a more prominent Asian player when china is expanding rapidly.