Strategic investment in India for Japanese investors

India is the world’s sixth-largest economy and expected to continue growing in the next decade, with much of success and growth due to its appeal to foreign investors – attracted by the size of the opportunity, demographics, low-cost manufacturing and rule of law.

Despite the impact of the pandemic, India received USD60.3 billion in foreign direct investment from April to December 2021, due to continued government measures to transform inbound and existing domestic investment.

To maintain its position as a top investment destination among strategic partners like Japan, and promote the ease of doing business, the government has introduced multiple regulatory reforms and relaxations, reflected in the 2022–2023 federal budget, announced on 1 February 2022.

Japan is India’s fourth-largest investor with a keen interest in the nation’s health sector, supply chains, and mobility or robotics sectors. Continued initiatives by both nations, such as Japan’s Official Development Assistance programme and the joint Japan-India Startup Hub, connecting Indian startups and Japanese companies, keep tightening this strategic partnership.

In this article, the authors explore key factors incentivising and bolstering Japanese investment in India.

STRATEGIC PARTNERSHIP

India and Japan’s formal diplomatic relationship started in 1952 when both countries opted for a bilateral peace treaty, instead of signing the multilateral San Francisco Peace Treaty. The 70-year relationship has since grown into a global strategic partnership.

The 70th anniversary theme “Building a future for our Centenary” clearly aims to continue taking the relationship towards its 100th anniversary.

India is already a long-term home to various illustrious Japanese companies such as Maruti Suzuki, Toyota Kirloskar Motors, Isuzu Motors, Nippon Steel, Panasonic, Hitachi, Honda, MUJI and UNIQLO. In total, Japan’s External Trade Organisation (JETRO) and the Japanese Embassy note that India is home to 1,455 Japanese companies.

Japan has played a key role in promoting economic and industrial development in India, becoming the biggest lender through affordable loans, grants, technology sharing initiatives and schemes. A 2019 survey conducted by the Japan Bank for International Co-operation placed India at the top for potential business expansion for Japanese companies in the mid-term (next three years). According to a report released by the technology industry apex body Nasscom on 1 November 2021 in partnership with the Nomura Research Institute, Japanese investment in India has grown four times since 2016, creating 102,000 jobs.

INDIA OPPORTUNITY

The federal budget now bolsters a slew of schemes and relaxations across various sectors, from insurance and green energy to artificial intelligence and infrastructure, which positions India as an attractive and investor-friendly destination and helps draw investment from strategic partners like Japan.

Production linked incentive (PLI) scheme. The PLI scheme, launched two years ago, provides a cashback of 4-6% to a manufacturing unit based on incremental sales for five years. Coupled with a reduced tax rate for new manufacturing units to 17%, among the lowest in Asia, Japanese investors can expect a conducive manufacturing ecosystem in this sector.

India has received numerous applications from Japanese companies under the PLI scheme. Among them, Daikin showed huge interest, establishing its third manufacturing unit at Sri City, Andhra Pradesh, to make India a manufacturing hub for West Asia, the Middle East, South America and Africa.

Gujarat International Finance Tec-City (GIFT City). GIFT City aims to become a global financial hub along the lines of Dubai International Financial Centre, with continued incentives announced, including a liberal tax regime and the only place in India to allow offshore transactions, along with a pool of skilled professionals.

Attracting both domestic and international investors, GIFT City is an excellent option for Japanese companies looking to set up operations in India without the hassle of extensive compliance with local laws.

Digitalisation. The pandemic has seen a rapid digital transformation and the development of an e-commerce ecosystem in India. Yasuyuki Murahash, chief director general of JETRO India, said: “The growth of India’s digital sector under covid-19 has been remarkable, and many Japanese companies are paying attention to the Indian ecosystem.” Japanese investment has played a major role in creating tech jobs in India through investment in IT and startup ecosystems. The India-Japan Digital Partnership and India-Japan IT Corridor further augment the appeal of this sector.

Pandemic tax relief. Noting hurdles faced by the manufacturing sector and startups during the pandemic, the government provided relief to new manufacturing companies by proposing a lower corporate tax rate of 15% in the budget.

Exciting startup economy. India has recognised 16,737 startups as of 31 January 2022. With an 80% reduction in the cost of filing patents, lower compliance thresholds, tax holidays for three years, and tax savings for investors, Indian startups are a prime opportunity. The above-mentioned Japan-India Startup Hub encourages collaborations between startups, investors and incubators. Nasscom reports that more than 100 Japanese investors have funded at least 240 Indian startups. By May 2021, Japanese investments in Indian startups had reached USD9.2 billion and generated over 217,000 jobs.

Atmanirbhar Bharat Abhiyaan. Founded on the principles of self-reliance and self-sufficiency, Prime Minister Narendra Modi’s “Atmanirbhar Bharat Abhiyaan” policy is an output-linked incentive plan to boost local manufacturing. The vision is to “Make in India for the world” and it provides collateral-free automatic loans to India’s micro, small and medium-sized enterprise sector – offering foreign investors a gateway to a lower tariff manufacturing regime, coupled with the technological infrastructure far superior to competitors such as Vietnam or Myanmar.

SECTORAL POTENTIAL

While sectors such as infrastructure, railways and automobiles will continue to garner foreign investment interest, the following sectors have the potential to herald a new wave of economic progress between India and Japan.

Infrastructure. The budget also focuses on increased investment in the infrastructure sector, specifically railways, highway networks, and multi-modal national parks, to name a few. The proposed “One Product, One Railway Station” scheme will focus on promoting the supply chain of local products using the railways.

It has proposed to introduce 400 new semi-high speed Vande Bharat Express trains along with 100 terminals in the next three years. With fervent efforts to expedite construction of the Mumbai-Ahmedabad bullet train using Japanese Shinkansen technology, the budget gives another opportunity for India and Japan to build upon their existing international economic relationship.

Electric vehicles (EVs). The EV market in India is estimated to be a USD7 billion opportunity by 2025. With plans to convert 40-50% of India’s two-wheelers and three-wheelers into EVs in the next decade, the government has already put in place the faster adoption and manufacture of hybrid and EVs scheme, with phase II extended up to 31 March 2024.

Increased FDI limit. The FDI limit has been increased up to 100% under the automatic route for India’s petroleum and natural gas and telecom sectors. In 2021, India raised FDI limits in the insurance sector from 49% to 74% under the automatic route (not requiring prior government approval) to attract more capital inflows. In 2015, the government hiked the FDI cap in the insurance sector from 26% to 49% and had earlier allowed 100% FDI in insurance intermediaries.

E-commerce. While many industries thrive in the pandemic, e-commerce has seen enormous growth in sectors like pharmacy, clothing, edtech and consumer durables. The online retail market is now estimated to be 25% of the total organised retail market – with electronics and apparel comprising almost 70% of the e-commerce market.

Japanese industrial townships. A dozen integrated Japanese industrial townships have been established under The Japan-India Investment Promotion Partnership, offering an environment in which Japanese companies can smoothly establish manufacturing sites. Investors are offered substantive tax concessions on electricity duty, land acquisition, stamp duty, etc.

Institutional support in the form of: (1) Japan Plus (part of the Ministry of Commerce and Industry) offers Japanese investors a one-stop location for resolving problems; and (2) JETRO’s five integrated business support centres offer extensive consulting services to Japanese companies entering the market.

In August 2021, a memorandum of understanding was signed by the Bangalore Chamber of Industry and Commerce with JETRO, Toyota Tsusho India, Inter Trade KK and the India Research Institute to support the business community and strengthen the relationship between India and Japan.

CONCLUSION

Japan and India are committed to combining investment opportunities in India with Japan’s technology and capital pool to intensify the potential of the India-Japan partnership at the global level and tilt the balance of power in the Asian subcontinent. As Japanese investors evaluate India from an investment destination and target market perspective, the above factors present a strong case for India to emerge as the hub for their Asian expansion.