India-Japan Economic Partnership Agreement: Gains and Future Prospects

  • Geethanjali Nataraj
  • Ashwani

This paper attempts to analyse the initial impact of the Comprehensive Economic Partnership Agreement between India and Japan on both trade and investment relations and other areas of cooperation. Even though it is too early to make a thorough impact assessment, the study seeks to bring out some facts related to the effectiveness of the agreement.

The globalisation process has facilitated the world economies in sharing the fruits of free trade, migration of labour, capital flows, and transfer of technology. The importance of trade has been explored under the endogenous growth theory where it has emerged as one of the peripheral factors for economic growth along with other traditional inputs. In order to strengthen international trade, a plethora of studies have empirically investigated various trade theories over time and designed policies accordingly. The invention of modern trade theory has highlighted the role of comparative advantage (inter-industry trade) as well as production differentiation (intra-industry trade) as a basis for pattern of trade. In the recent past, world economies are giving due importance to economic partnerships across nations. India has moved towards institutionalising economic partnership with a few Asian countries. Examples include: India-Singapore Comprehensive Economic Cooperation Agreement (CECA) in 2005; India-Korea CEPA in 2010; and India-Malaysia CECA in 2011.

The Comprehensive Economic Partnership Agreement (CEPA) between India and Japan was signed on 16th February, 2011 and came into force from 1st August of the same year. Apart from accelerating business activities, the deal aimed to eliminate tariffs on 90 percent of Japanese exports to India, such as auto parts and electric appliances, and 97 percent of imports from India, including agricultural and fisheries products, until 2021. Since the introduction of CEPA, India–Japan merchandise trade has increased by 38 percent, with total bilateral trade expected to reach US$24 billion by March 2013. Keeping in view the agreement, Mukhopadhyay and Bhattacharyay (2011) evaluated the economy-wide impact of the trade integration between Japan and India using Global Trade Analysis Project (GTAP) analysis. It was found that the output will increase marginally for both India and Japan in 2020 after tariff reduction compared to Business As Usual (BAU). The results expected a marginal export growth, a fair amount of trade creation and improvement in the welfare of both the countries by 2020 with the successful implementation of CEPA.

The agreement had two major concerns, namely: the infrastructure in India, and non-tariff barriers in Japan. On the infrastructure front, the two countries agreed to collaborate on the huge, US $90-billion Delhi–Mumbai Industrial Corridor (DMIC) project in 2006. The key agenda of the DMIC project involves the development of nine industrial zones; a high-speed freight line; three ports; six airports; a six-lane intersection-free expressway; and a 4,000-megawatt power plant. The project agreement appears highly promising in the environment of the new manufacturing policy whereby India is targeting to increase the share of manufacturing in GDP to 25 percent within a decade, potentially creating 100 million jobs.

There are; however, some issues that serve as a hindrance to the fullfledged success of the project. These are:

(i) Unclear decisionmaking and ownership of operation due to a lack of consensus among many stakeholders, such as the DMIC Development Corporation, and Central and state governments in India;

(ii) Unsatisfactory business plans proposed by the Indian delegation to Japanese promoters.

At the same time, the infrastructure deficit in India remains a serious issue for Japanese investors. According to the Japan External Trade Organization's FY 2011 survey, the top business problems in India are power shortages or blackouts, and inadequate logistics infrastructure (identified, respectively, as 71.6 percent and 64.8 percent by firms covered in the survey). The Indian government itself has recognised the deficit, estimating that US$1 trillion of investments in infrastructure are required in order to achieve a nine-percent growth rate.

For its part, India has also expressed its own concerns about the agreement. New Delhi has urged Japan to remove all non-tariff barriers so that real benefits envisaged under the CEPA are realised, particularly those that would be earned from the Japanese pharmaceutical market. It is mutually acknowledged that Japan's high demand for generic medicines can be potentially fulfilled by India, providing a win-win situation for both countries.

On April 30, 2012, the first India–Japan Ministerial-level Economic Dialogue was held in pursuit of the same objectives as stated in CEPA. The dialogue showed that today the relationship between the two nations has become more equal—both are allowing for mutual concessions and compromises to help realise the expected gains. Both countries agree that the success of CEPA depends upon multiple dimensions. The identification of potential trade and investment areas between the two countries puts forth a major policy agenda before them for realising the expected gains of the pact.

Japan and India are two leading economies in Asia. According to the World Development Indicators 2012, Japan's Gross National Income (GNI, estimated based on purchasing power parity) for the year 2010 was $4.43 trillion, while its GNI (PPP) per capita stood at $34,790. Japan's GDP grew at 5.3 percent in 2009-10 after registering an average growth rate of 0.9 percent during the period 2000-10. Comparative figures for India stood at $4.17 trillion, $3,560, 8.3 percent and 8.0 percent respectively.

The Japanese economy is highly advanced, with the services sector accounting for 71 percent of the GDP in 2009. The industrial sector, once the engine of Japan's growth, now contributes only 28 percent to the GDP while the agricultural sector accounts for one percent. Similarly, the services sector is the largest contributor to India's GDP, accounting for 55 percent while agriculture and industry contribute 18 percent and 27 percent, respectively.

India and Japan, therefore, share a similar structure especially with regard to their reliance on the services sector. In recent years, the two countries have strengthened their bilateral ties through new initiatives and programmes, ranging from economic and cultural linkages to defence and security tie-ups. The year 2007 was also officially celebrated as the Year of Friendship between the two countries. Japan gives 30 percent of its official development assistance (ODA) to India and remained committed even during the period of the global economic downturn. For example, Japan has granted almost $4 billion for the Delhi-Mumbai Industrial Corridor (DMIC).

The economic part of the relationship, however, remains far below potential. Japan, with a population of around 127 million, has slipped behind China to become Asia's second-biggest economy. According to WDI, its gross domestic product (GDP) totalled $5.5 trillion in 2010. On the contrary, the GDP of India, the third-largest economy in Asia, totalled $1.7 trillion in the same year. It has the world's second-biggest population at more than 1 billion people.

Japan and India agreed in 2007 to increase two-way trade flows to $20 billion by 2010. However, the total fell short of the target, reaching only 1290 billion yen (around $15.85 billion). For 2011-12, India-Japan bilateral trade stood at $18.31 billion, representing an increase of 32 percent over the previous year. The comprehensive trade pact between India and Japan aims to nearly double bilateral trade to $25 billion by 2014. Japan exports mainly machinery, electronics, iron and steel products to India, while India exports mainly oil, iron ore and chemical products to Japan. Japan is India's 12th-biggest trading partner, while India is Japan's 27th-biggest trade partner. Bilateral trade and investment flows between the two countries have been short of spectacular because Japanese companies have focused on business with China and Southeast Asia. About 870 Japanese firms are operating in India and Japan's direct investments in India totaled some 241 billion yen in 2010 (543 billion Yen in 2008), according to Japanese government data.

In the context of the global recovery and the two countries trying to increase trade and exports, a paper on Indo-Japanese trade relations and also analysis of services, investment and other areas of cooperation in the backdrop of the signing of the Economic Partnership Agreement (EPA) would be relevant to highlight the problems faced by the two countries and to suggest measures to boost trade and investment between them.

Author(s)

Geethanjali Nataraj

Ashwani