Development, Economics and finance, Environment & energy, International relations | East Asia, South Asia

1 February 2016

Enhanced economic and energy cooperation will set the tone for greater engagement between Asia’s second and third largest economies, Kakali Mukhopadhyay writes.

The recent visit to India by Japan’s Prime Minister, Shinzo Abe, was a landmark in the development of bilateral ties. Japan has a surplus of capital and a shortage of growth opportunities, while India has endless possibilities but needs capital.

Japan has long been a significant investor in India’s infrastructure sector; the countries have been expanding their economic and strategic engagement since a Comprehensive Economic Partnership Agreement in 2011, and elevated this to a Special Strategic and Global Partnership in 2014.

During the recent visit India and Japan inked four major pacts, centered on India’s bullet train, nuclear energy, military equipment, defence technology and manufacturing, particularly cars.

Japan will build India’s first bullet train and provide a US$12 billion financing package with a low-cost, long-term loan. The Indian Prime Minister, Narendra Modi, has pledged to overhaul India’s ramshackle railways and other infrastructures as part of his ambitious economic reforms.

The second pact concerns nuclear energy – over the past seven years, Japan and India had made some progress on a nuclear deal.

The next is strengthening defence ties. Japan’s Ministry of Foreign Affairs has said these ties with India are now “fundamentally important” to Japan. India’s flagship Make in India program will also benefit from defence co-production plans.

Other agreements include stepping up the transfer of defence equipment and technology, with possible future projects including Japanese-made seaplanes. An Act was also signed which will ensure Japan’s importing cars from India, and Maruti (Suzuki) will manufacture cars in India for export to Japan.

The implications of all these agreements for India will be immense. In the short term, the growing intimacy between Japan and India, co-ordinating with US strategy and co-operating with BRICS member states, will yield direct influence upon regional architecture. Importantly, China’s assertiveness, particularly in maritime territorial disputes, is prompting Asia-Pacific nations to look to India to play a balancing role.

In the medium term, security concerns are less pressing for India than they are in Japan because of seaborne trade with China. Japan is looking at India as a net security provider in the region, and with Japan taking the historic decision to ease its defence export laws, India looks set to be a major gainer. As the most advanced Asian naval power, Japan offers significant partnership opportunities.

The recent changes in Japan’s defence export policies and regulations offer immense possibility to engage in a new era of cooperation for high-end defence technology and equipment. The message is that India is increasingly willing to play a more active and prominent strategic role, exemplified by enhanced defence diplomacy in East and Southeast Asia.

Enhanced economic and energy cooperation will benefit both countries. Both the US and Japan want India to have a decisive influence in their alliance. The new pacts will set the tone for enhanced engagement between Asia’s second and third largest economies in virtually all areas and affirm Japan’s pivotal role in India’s diplomatic-strategic matrix.

More on this: India's changing energy policy | Micha’el Tanchum

Japan will play a significant part in transforming the infrastructure and the economic landscape of India. In the last 12 years, Japanese companies have pumped US$12.66 billion into India, accounting for 7 per cent of total Foreign Direct Investment. The two countries are confident of doubling this investment, and bilateral trade could surge to US$100 billion by 2020. Japanese technology and expertise will also come in handy regarding the Modi government’s stated mission to build 100 smart cities.

Despite the benefits of the partnership though, one cannot ignore the drawbacks.

From an economic perspective, defence equipment and car manufacturing will generate additional output, export, GDP, and skilled and semi-skilled labour growth, but the impact on the environment will not be favourable, and India has crucial environmental issues.

The prospect of a nuclear deal with Japan is a cause for concern as it takes India a step closer to the construction of untested and expensive reactors. Instead of investing such a huge amount of money on this project, the government should have addressed dilapidated infrastructure. Despite the government’s Make in India rhetoric, the agreement will primarily benefit multinational corporations based in Japan.

Even accounting for a reduction in construction costs in India, a reactor that costs USD US$11.6 billion in Europe is likely to lead to a first-year tariff of about Rs.19 per unit of electricity, while for coal and solar power, the tariffs are in the range of Rs.4.50 to Rs.5.50 per unit.

Again, with domestic Indian reactors nuclear power has been an expensive source of electricity, but with imported reactors the costs become prohibitive. This is, in large part, due to the astronomical capital costs of reactors.

The India-Japan nuclear deal is meant to pave the way for Japanese corporations to sell their wares in India – but India should resist this sales pitch for cost and safety reasons. The reactors under consideration are untested and provide no empirical track record for safety, and there is a real possibility of a devastating accident. Instead of nuclear, the Indian government could use Japanese investment and technology for the development of solar and wind power, and contribute to both energy security and low carbon emissions.

A bullet train sounds impressive but it is not feasible for India, rather it is a luxury, even though it will generate some employment, infrastructure development and a GDP rise. Most importantly, a bullet train requires a specific track and huge tracts of land and again, weak and ill-maintained infrastructure mean an accident is likely. Above all, a loan of Rs. 81,000 crore for the project will be too much debt for the nation. Instead, upgrading the Indian railway network would be more economically beneficial.

India’s new government wants to pursue a more ambitious foreign policy agenda, including carving out a niche global role for itself. Its early interactions with East and Southeast Asia have been promising, and partnerships with Japan combine well with its growing economic and strategic interests. To make the partnership work, both countries need to accelerate structural reforms to reap the maximum benefit. This could be a win-win result.

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Mukhopadhyay, Kakali. 2017. "Price And Potential Of The India-Japan Pacts - Policy Forum". Policy Forum.