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From Japan with love

Japanese Prime Minister Shinzo Abe recently visited India with a delegation of 200 CEOs. On his agenda were plans to develop the $90-billion Delhi-Mumbai Industrial Corridor. Will this result in a torrent of Japanese FDI in India?

By Amit Mukherjee        Print Edition: Sept 23, 2007

It's still an emerging partnership. But the fledgling Indo-Japanese partnership has the potential to become a game changer in Asia. Japanese Prime Minister Shinzo Abe's recent visit to India was short on specifics. That was expected. After all, both he, and his host, Prime Minister Manmohan Singh, are battling domestic political crises. A careful joining of the still-scattered dots, however, points to a bigger picture that is tantalizingly audacious, though still slightly blurred on the details.

To say that bilateral trade-which clocked $6.5 billion (Rs 26,650 crore) in 2006-07 has underperformed its potential would be to state the obvious. Abe and Singh have agreed to increase this to $20 billion over the next three years. Japanese companies have also been slow to bite into the India growth story. With the exception of automobile companies like Suzuki, Toyota, Honda Motor Company, and Mitsubishi Chemicals, Japan Inc. has fought shy of committing large investments to this country. But the $90-billion (Rs 3,69,000 crore) Delhi-Mumbai Industrial Corridor (DMIC) is likely to change that quite dramatically. India's infrastructure, or rather, the lack of it, is cited as one of the primary reasons for the reluctance of Japanese businessmen to invest in this country. The 1,483-km DMIC envisages a high- speed railway freight corridor between Delhi and Mumbai, where average speeds will be 75-100 kmph compared to 30 kmph at present. Nine mega industrial zones of about 200-250 sq. km each will be set up along the route which will cross six states (See Corridor of Opportunity). "Japan will provide all possible assistance for DMIC and the project will trigger a new industrial revolution in India," Abe promised during his visit. Japan will provide a third of the funds required for the project. But more on that later.

Why Now?

Japanese investors are reputed to be the most cautious in the world. They take a long time-sometimes decades-to do their due diligence of investment destinations, but once they're convinced of a country's potential and dependability, they come in droves. "There is definitely a huge scope here; that is why we are all here, but we will have to understand the fine print of Indian laws first," says Susumu Ueno, Managing Director of Komatsu, a leading Japanese heavy engineering company, who was part of Abe's 200-member business delegation.

The successes of Maruti Udyog, a Suzuki subsidiary, Hero Honda, Honda Motorcycle & Scooter India and Honda Siel, all joint ventures or subsidiaries of Honda Motor Company, and Mitsubishi Chemicals have whetted the appetites of Japanese companies and proved that India is a country they can do business in. But Abe's promise of establishing "an arc of freedom and prosperity" comprising Japan, India, Australia and the us-the reference pointedly excludes China-betrayed where the real nudge was coming from.

More than 30,000 Japanese companies have poured an estimated $60 billion into China over the last two decades. In contrast, less than 500 members of Japan Inc. have invested only about $2.6 billion, or a little over 4 per cent of its investments there, in India. But the rise of China-which nudged out the us as Japan's largest trading partner in 2004-as a major player on the global stage is causing disquiet in the corridors of power in the latter. Hence, there's a new urgency among Japanese businessmen to spread their political risk and build up India as a counterweight to the communist giant. Incidentally, India is the only country with which Japan has an understanding to hold annual Prime Ministerial summits. Though both countries have downplayed or denied the geo-political underpinnings of their relationship, it is evident that DMIC forms the centrepiece of that strategy. Says Jagdish Khattar, md, Maruti Udyog: "I travelled with Prime Minister Manmohan Singh to Japan last year and the signals were clear that bilateral relations would improve dramatically over the next decade."

DMIC Decoded

The DMIC, for which Japan was made the official partner during Manmohan Singh's visit to Tokyo last December, is by far the largest and most ambitious foreign-funded project ever envisaged in India. It will also be the single-largest commitment made by Japan to a single foreign project. The corridor, which will pass through six states-Uttar Pradesh, Haryana, Rajasthan, Gujarat, Madhya Pradesh and Maharashtra-will include, besides the nine industrial zones and the high- speed freight line, three ports, six airports, a six-lane intersection-free expressway connecting the country's political and financial capitals and a 4,000 mw power project. Then, each of the industrial hubs will have social infrastructure like housing, recreational facilities and-most importantly, from the point of view of Japanese executives who will relocate to India-golf courses. The details have not yet been finalised, but thousands of Japanese companies are expected to invest billions of dollars in setting up shop in these industrial hubs. This will be in addition to the $30 billion that Abe has promised in loans for financing the project infrastructure.

Says a senior official in the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce: "The DMIC-dedicated rail freight corridor will create certainty in movement of goods and provide faster transport links to sea ports." The industrial hubs will come up around existing urban or semi-urban agglomerations and industrial clusters. "This is because brownfield expansions are more cost-effective and involve smaller gestation periods compared to greenfield ones," the official explains.

Asked pointedly if these industrial hubs will be conceptually similar to Special Economic Zones, which have got embroiled in controversies over the acquisition of land, he avoids a direct reply, saying, instead, that the state governments concerned may or may not acquire all the land required for them. "They will notify the land under the relevant laws for planning and zoning to ensure coordinated development," he says, but declines to elaborate further. "The basic infrastructure-like rail, roads, ports and telecommunications linkages-will be provided by the Centre and the state governments concerned," he adds. Users of the external as well internal infrastructure will pay for their use, except for those that the government supports through budgetary resources. The Centre may provide the initial funding through existing schemes for creation of these external infrastructure linkages. The DMIC blueprint, which is currently being finetuned by the Commerce Ministry, is expected to be ready by the end of the year. Commerce Minister Kamal Nath says this project will create three million jobs.

The first phase of the project, which will be ready by 2012, will include six of the nine planned industrial hubs. Commenting on the project, Japan's Minister of Economy, Trade and Industry, Akira Amari, who visited India a month before Abe, had said that Japan was keen to invest in India's infrastructure in order to make it a hub for production and exports to Europe and Asia. Adds Khattar: "Japan's decision to fund the DMIC is partly driven by its desire to assuage fears about India's infrastructure."

Infrastructure the Key

Japanese companies routinely complain about poor infrastructure in India, though this does not seem to have deterred Suzuki or Honda or even their South Korean rivals like Samsung, LG and Hyundai, which have carved out a commanding presence in this country. "Infrastructure is lacking in various sectors; improving this will boost the economy further," says Toshiyuki Abe, VP Mitsui Chemical Group, adding: "We are looking at the power, construction, and infrastructure areas."

The partnership, obviously, is a win-win one for the two countries. Says Sunil Bharti Mittal, Chairman, Bharti Group and President, CII: "While India offers a tremendous opportunity in terms of geographical, mineral and labour resources, Japan's manufacturing prowess and excellence is well known, and we still recognise the significant impact Suzuki's Maruti project had on the Indian economy."

Japan's confidence in India has been bolstered by collaboration on development of Delhi's successful metro rail system. About 60 per cent of the project cost came in the form of loans from the Japan Bank of International Co-operation under that country's Overseas Development Assistance (ODA) programme, and Japanese companies such as Mitsubishi won key contracts. Pointing to the Metro Rail project as a shining example of economic co-operation between the two countries, Prime Minister Abe said: "India (which is the largest recipient of ODA) will continue getting such funds for infrastructure development, particularly for the Delhi-Mumbai dedicated freight corridor."

India is also keen on buying nuclear reactors and related technology from Japan-a logical extension of the Indo-us nuclear deal-but avoided detailed discussions on the subject in view of the political sensitivities involved.

So, will Abe's "arc of freedom" diplomacy open the floodgates for Japanese investments in India? Says Khattar: "Prime Minister Abe brought 200 executives with him and their seniority was a sign of how seriously the Japanese government is egging on industry to invest in India."

India Inc will say Amen to that.

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