Seeking an Investing Partner in Japan: Analysis of India-Japan relations
– Varuni Agarwal and Tushar Chitlangia
INTRODUCTION
The recent India-China border dispute and the subsequent trade war has reaffirmed that India would need a long-term partnership with its allies. As per recent data, Japan is the fourth (4th) largest Foreign Direct Investment (“FDI”) contributor in India and accounts for 7% of the total FDI inflows, with equity of around $200 billion. With a widening trade-deficit, and looming uncertainty regarding trade with China, India needs to look forward to a global partnership with Japan, with whom it also shares a common intent to counter China’s clout in Asia. Japan’s keen interest in India’s large market could also be witnessed by Japan’s gracious attempt to keep India in the Regional Comprehensive Economic Partnership agreement when India walked out of it.
This article aims to discuss the importance of retaining Japanese FDI in India, and suggests possible measures to achieve the same. The article discusses the challenges faced by the power sectors, which has been a significant cause of concern to Japanese investors in India. It elaborates on the issues arising at different stages of power-dissemination in India, namely production and distribution. Finally, the article demonstrates how India can balance its Atma-Nirbhar policy and Make in India vision with Japanese FDI to fully realise and utilise real benefits from Japan.
EXAMINING THE INDIAN POWER SECTOR
A 2012 Survey on ‘Business Conditions of Japanese-Affiliated Firms in Asia and Oceania’ presented that 66.4% of Japanese companies faced power blackouts in India, which is a discouraging factor for many Japanese firms to further invest in India. Hence, it is evident that expanding the power sector is of paramount importance for India for securing Japanese investment.
Power sector expansion in India primarily depends on securing a large amount of FDI from institutional investors. Foreign investors rely heavily on a stable political climate, responsive legal framework and resilient infrastructural facilities, which includes the expeditious process of land acquisition permit, expanding power distribution and coal production. A stable political climate guarantees conformity with mutual commitments, which India lacks. An instance can be seen through Jagan Mohan Reddy, the current Chief Minister of Andhra Pradesh’s, efforts to reverse almost every policy launched by his predecessor N. Chandra Babu Naidu. Recognising this, the Finance Minister of India, Nirmala Sitharaman, affirmed that India would honour its contractual obligations without fail.
To boost the coal production in India, certain amendments were made to the Mines & Minerals (Development and Regulation) Act, 1957 and the Coal Mines (Special Provisions) Act, 2015. These amendments removed the limits on competition in coal mining auctions and fully opened up the coal market to industrial mining by domestic and foreign companies. Although the amendments can be assumed to increase coal production, concerns still remain for obtaining land-acquisition permits from the present prolonged process, which too, is an outcome of political instability. Land, being a State subject as per Schedule 7 of the Indian Constitution, poses regional governmental issues due to difference of ideologies and planning between State and Central Government. Thus, State Governments are reluctant to provide land permits for Centre-approved projects.
To create and retain a more balanced and consistent distribution of electricity across the country from surplus to deficit areas, the National Grid was set up. The National Grid is a high-voltage electricity network in mainland India, linking power stations and major substations, ensuring that electricity generated anywhere in mainland India can be used to meet demand elsewhere. The distribution of the generated electricity is mainly done by government entities. However, in industrial cities such as Delhi, Mumbai, Ahmedabad, and Kolkata, private firms operate power distribution companies (DISCOMs). Due to under-pricing of tariff for agricultural and residential consumers, costs are higher than revenue, creating situations where, in times of heavy demand from industrial sectors, power producers would cut production to what they had expected, rather than producing more electricity. Thus, the system requires to be designed to encourage and incentivize producers to supply more at a time of heavy loading.
In order to stabilise tariff-rates and make them profitable for investing firms, the government needs to revamp the existing tax system. Further, it must strive to implement the GST to promote uniformity. India needs more significant investment to achieve its optimistic target of 175 GW of solar energy output by 2022, which demands a healthy inflow of FDI. When India is able to do so, it will serve three fundamental functions: 1) minimize its reliance on coal and imports; 2) assuage its domestic needs; and 3) commercialize its surplus production internationally.
BALANCING ATMA- NIRBHAR BHARAT AND MAKE IN INDIA
With global supply chains collapsing due to COVID-19 and an arising sentiment calling for reducing trade dependence on China, India rolled out its ambitious policy of Atma-Nirbhar Bharat.The objective of this policy is to make India a self-reliant country by increasing domestic production. However, Atma-Nirbhar Bharat does not translate to India being an isolationist country; rather, it is about integrating FDIs with India’s self- sufficiency. Make in India, a flagship program launched by Prime Minister Narendra Modi in 2014, aimed at turning India into a global manufacturing hub. It did not restrict the flow of FDI. It initially aimed at raising the share of the manufacturing sector to 25% in India’s GDP by 2020, which now seems unattainable as, until 2019, the share was just 14%. Seemingly, India needs to apply robust measures to balance the duo policy mix – Make in India, and Atma-Nirbhar Bharat policy.
In 2014, to facilitate the Make in India program, Japan earmarked ‘Japan Make in India Special Finance Facility’ of 12 Billion USD to facilitate Japanese FDI into India. India should aim to utilise this facility in a much broader way and use it to boost the Japanese companies suffering in India due to COVID-19 and its consequential economic slowdown. Additionally, India should also aim to utilise the knowledge of advance technology prowess of Japan in all the major sectors which Japan dominates, like the automobile, electrical equipment, and telecommunication. This knowledge transfer will play a key role in developing the technical know-how required for self-sufficiency, which India presently lacks.
Furthermore, India must also aim to increase the members in the Japan-Plus Team, which is responsible for fast-tracking investments proposals from India and disseminating the same among Japanese investors, which now has only four representatives from India and three from Japan. Increased functioning and efficiency of Japan-Plus will give India an early mover advantage by attracting Japanese companies exiting from China in the wake of the pandemic. India will be a suitable host for Japanese companies as they perceive India to be having low labour costs too, along with a “clean image” in the trading world. Additionally, an India-Japan Industrial Competitive Partnership was launched in December 2019 to develop industrial zones for attracting more FDIs. India should aim to design these industrial zones by giving some incentives to the sectors of intermediate goods on which Japanese businesses in India are dependent on China. This will ensure that the production activities are not hurt, and India swiftly moves one step ahead towards an Atma-Nirbhar Bharat.
As per a Japan External Trade Organization (JETRO) Survey 2019, 43.6% of Japanese companies in India were domestic sales-oriented, and 56.4% of Japanese companies exported goods to different nations. Though the number is sufficiently high, it is liable to fall this year due to the adverse impact of COVID-19. Institutional safeguards and interventions are required to maintain the export status quo.
CONCLUSION
To accommodate its double vision of Atma-Nirbhar Bharat and Make-in India, India needs massive investment from both the domestic private sector and foreign investors. India heavily depends on imports in electronic and automobile sectors to sustain the domestic demands. To boost India’s involvement and promote the programs of Atma-Nirbhar Bharat and Make in India, incentivising automobile and electronic sectors- which are apparently the major sectors of Japanese investments as well, is of utmost importance.
The amendments enacted in 2020 seem promising as a responsive legal framework to boost power sector. However, India needs to take further steps to improve institutional development like political stability, regulation of private DISCOMs and restructuring of government-owned DISCOMs to improve the power sector.
Given the prevailing situation, where Japan is providing support of around $200 million to incentivise factories to move from China to different parts of the world, India needs to create “an attractive business environment” for gaining the early mover advantage. Attracting FDI requires resolving institutional issues like inter-government conflicts, expediting land acquisition permits process, which in-turn requires a simplified procedure and an increase in the number of employees in the process.
As many situations are inter-connected, to produce more cost-effective methods, robust planning can be done through a dedicated 5-year plan as these reforms would not only help India secure trade partnership with Japan but also incentivize interested investors from across the globe.
Varuni Agarwal and Tushar Chitlangia are law students at National Law University, Odisha.