The flourishing India and Japan business partnerships

In a world of shifting trade allegiances, the business alliance between India and Japan testifies to longevity, stability and shared ambitions. The ever-deepening ties between the two Asian powerhouses are built on common aims of sustainable growth, technology driven strategic collaboration and investment in capital-intensive industries.

The partnership thrives on complementary economic needs and opportunities. India is an ideal destination for Japanese businesses’ search for yield-driven growth, driven by an ultra-easy monetary policy and historic deflation at home. As one of the fastest-growing economies, India offers opportunities across diverse sectors from technology to infrastructure, aligning with Japanese investment interests. The Indian government has encouraged a welcoming environment for Japanese foreign investment through progressive policies and initiatives. Rising geopolitical tensions and a global reevaluation of investment destinations have prompted Japanese businesses to diversify their investment portfolios, with India a preferred choice.

From 2000 to September 2023, Japanese foreign direct investment (FDI) in India was USD40.84 billion. In 2023 alone, this figure was USD1.79 billion, making Japan the fifth-largest investor in India. Investments span many sectors, including automobiles, electrical equipment, telecommunications, chemicals, finance and pharmaceuticals.

Renewable energy (RE) is an important sector for collaboration. In pursuit of its environmental goals, India aims to achieve 500GW of non-fossil fuel power generation capacity, a significant increase from its current capacity of approximately 185GW.

With falling power procurement prices, the attractiveness of RE projects depends on the availability of affordable, long-tenor financing. The India-Japan Fund, a joint venture between the National Investment and Infrastructure Fund Limited of India and the Japan Bank for International Co-operation, symbolises this commitment, and is poised to invest INR49 billion (USD600 million) not only in clean energy projects but also in those involving environmental preservation and waste and water management. A draw for Japanese investors is the Indian government’s structural reforms. These include supporting financially distressed electricity distribution companies through augmenting their ability to make timely payments for power procurement; streamlining their accounting, reporting and billing processes; introducing alternative protective mechanisms such as sovereign guarantees for government payments under power purchase agreements (PPA); simplification of land acquisition, and faster resolution of regulatory risk. Public PPAs now include robust and investor-friendly contract clauses addressing unanticipated cost increases because of regulatory and tax changes. Such clauses allow cost increases to be passed on to the end consumer, through tariff increases.

An investor concern has been the need for multiple approvals from the central and state governments, given India’s federal nature. To address this, the Indian government has introduced reforms such as the Electricity (Second Amendment) Rules 2023 and the National Single Window System to streamline processes and reduce investment hurdles.

Another area of collaboration is startups. Japanese investments in India’s startup ecosystem come when the sector is achieving financial maturity. The government’s support to the country’s startup ecosystem has caught the attention of investors across the globe. Ministries and government departments have introduced schemes giving financial, infrastructural and regulatory support to startups in a number of sectors. These factors have attracted new global investments to India’s startup economy. Major investments in startups by companies such as Suzuki, Toyota and Denso, show this shift in Japanese investment strategy from long-term to short-term ventures.

Recent judicial decisions in India in favour of Japanese investors such as Daiichi and Tata-Docomo evidence India’s determination to align FDI regulations with investor expectations, particularly predictability. Japanese companies are advised to adopt robust investment mechanisms, including comprehensive due diligence, structured transactions complying with local laws, strategic exit options and regular checks and forensic audits. The India-Japan business partnership is poised for exponential growth, driven by India’s pro-growth reforms and Japan’s diversification of strategic investments. This augurs well for the economic fortunes of both.

Pradeep Ratnam is a senior partner and Nishant Arora is a partner at Kochhar & Co.