In recent years, India’s story of growth has been widely considered as a paragon for Asian economies. Much of India’s success and growth has been due to its appeal to foreign investors, who are attracted by the size of the opportunity and the demographic, low-cost manufacturing, and rule of law. Despite the covid-19 pandemic, India has emerged as an attractive and durable investment destination. The UN Conference on Trade and Development reported that foreign direct investment (FDI) into India rose by 13% in 2020, while fund flows declined most strongly in major economies such as the UK, the US and Russia.
Part of the resilience shown by the Indian economy can be credited to ongoing measures taken by the government of India to transform the investment environment for inbound and existing domestic investors. For instance, by significantly liberalising India’s FDI laws in almost every sector, the government sent a strong message to global investors that India is open for business.
This is especially so for Japanese investors. The expansion and deepening of India’s partnership with Japan is evident with the convergence of political, economic and strategic interests. In this article, we will explore the key factors that have incentivised and bolstered Japanese investment into India.
Special strategic partners
Japan has played a key role in promoting economic and industrial development in India through affordable loans, grants, technology sharing initiatives, and schemes like the Official Development Assistance Programme, becoming the biggest lender to India. Japan further cemented its commitment as India’s long-term infrastructure partner by contributing to the development of dedicated freight railways and the Mumbai-Ahmedabad bullet train, using Japanese Shinkansen technology.
With a view to tackling China’s predatory geo-economics, and to steer clear of the US-China trade war, Japanese investors should now consider India as a means to de-risk critical supply chains under former prime minster Shinzo Abe’s “China plus One” model. 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, to name a few.
The India opportunity
Post pandemic, as many global and Japanese firms evaluate their emerging market investments, India needs to continue to attract FDI capital. Infrastructure, defence, railways, pharmaceuticals, food processing startups and electric vehicles, among others, have emerged as high-growth sectors for investment. With several ASEAN countries rolling out incentives and investor-friendly policies, jockeying for Japanese investment, India’s foundational pillars for remaining a top destination are as follows.
An inexpensive and highly skilled workforce
With the world’s second-largest labour pool of more than 500 million people, India offers a competitive advantage with its low wage structure. With the establishment of the Japan-India Institute for manufacturing, more than 30,000 Indian personnel will be trained with Japanese-style manufacturing skills and practices, to further augment the manufacturing base.
In 2020, to significantly reduce the burden of compliance on employers, the government has consolidated a maze of more than 29 central labour-related laws into four labour codes on wages, industrial relations, social security, and occupational safety and working conditions.
Sectoral opportunities and initiatives
While sectors such as infrastructure, railways and automobiles will continue to garner foreign investment interest, the following opportunity sectors have the potential to herald a new wave of economic progress between India and Japan:
Defence. Recently, India raised FDI limits in the defence sector from 49% to 74% under the automatic route (not requiring prior government approval). With India and Japan agreeing to collaborate in the defence sector in the last annual summit on 4 November 2019, one can expect a significant amount of Japanese capital to be channelled in to manufacture complex military platforms and equipment.
Telecommunications. The recent announcements of the Electronic Manufacturing Cluster Scheme (which envisages the creation of various clusters with world-class infrastructural facilities) and the Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors (which offers a financial incentive of 25% on capital expenditure for the identified list of electronic goods that comprise a downstream value chain of electronic products) are expected to boost investor interest in the sector.
Drugs and pharmaceutical sector. The Indian pharmaceutical sector is currently the third-largest in the world in terms of volume. With 81 pharma clusters and available land parcels, the sector has tremendous untapped potential. The government has also launched the Bulk Drug Park Scheme, which, under grant-in-aid of about US$137 million, has been granted to three bulk drug parks for exclusive manufacture of active pharmaceutical ingredients and others, resulting in lowering the manufacturing cost of pharmaceutical products.
Electric vehicles (EVs). The EV market is estimated to be a US$7 billion opportunity in India by 2025. With plans to convert 40-50% of India’s two-wheelers and three-wheelers to EVs in the next decade, the government has already put in place the faster adoption and manufacture of Hybrid and EVs scheme (Phase II).
According to the Federation of Indian Chambers of Commerce and Industry, seven Indian states and three cities or regions have drawn partnerships with the prefectures and cities of Japan through memoranda of understanding (MoUs) in different sectors. States like Andhra Pradesh, Karnataka, Maharashtra and Uttar Pradesh are leading the pack in terms of offering sector-specific capabilities (particularly for electronics, auto and auto components, fintech, telecoms, pharma and medical devices, healthcare and defence). Fourteen national investment and manufacturing zones, which envisage largely integrated greenfield industrial townships, have also been approved across India. Several states are now competing for new investment, placing foreign investors in a highly advantageous position.
Uttar Pradesh has tremendous potential for electronic manufacturing pursuant to the Uttar Pradesh Electronics Manufacturing Policy 2020 whereas the startup policy formulated by the state of Karnataka confers a conducive environment for startups. Gujarat continues to remain the chemical hub of the country with eight chemical clusters while automobile manufacturing units would be ideally suited in Karnataka or Tamil Nadu owing to a new Machine Tool Park.
Exciting startup economy
Japan is India’s fourth-largest private equity or venture capitalist investor showing a keen interest in the nation’s health sector, supply chains, and mobility or robotics sectors. To enhance this relationship, the government has established the Japan-India Startup Hub to enable collaborations between startups, investors and incubators. India’s National Association of Software and Service Companies has played a key role to accelerate this collaboration.
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 India-Japan Digital Partnership and Information Technology Corridor Project in Japan further augments the appeal of this sector.
Japanese industrial townships
India has established 12 integrated Japanese industrial townships (JITs) that offer world-class infrastructure, and operational platforms with pre-approved licences, to hasten manufacturing in a plug and play model. JITs can also partner with Japanese investors to educate their workforce on manufacturing processes and quality control. Investors are offered substantive tax concessions such as electricity duty, land acquisition tax, stamp duty exemption, etc.
Production linked incentive (PLI) scheme
Launched in March 2020, the PLI scheme provides a manufacturing unit set up in India with a cashback of 4-6% based on incremental sales for five years. The scheme, originally launched only for the electronic manufacturing and pharmaceutical sectors, was widened to include 10 other sectors – food processing, telecoms, electronics, textiles, specialty steel, automobiles and auto components, solar photovoltaic modules, and white goods such as air conditioners and LEDs).
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 these prime manufacturing sectors.
Atmanirbhar Bharat Abhiyaan
Founded on the principles of self-reliance and self-sufficiency, Prime Minister Narendra Modi’s policy is an output-linked incentive plan to boost local manufacturing.
The policy’s 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 (MSME) sector. A fund of funds with a corpus of US$1.3 billion has been set up for MSMEs. Local MSMEs will also enjoy a preferential right to bid in public procurement projects below US$27 million, providing a new avenue of opportunities.
Indian MSMEs offer foreign investors a gateway to a lower tariff manufacturing regime, coupled with technological infrastructure far superior to competitors such as Vietnam or Myanmar.
Robust investor ecosystem
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) the Japan External Trade Organisation’s five integrated business support centres offer extensive consulting services to Japanese companies entering the market.
The technological and economic prowess of Japan, coupled with India’s established strengths in manufacturing, software, technology and related essential skill sets, has the potential to tilt the balance of power in the Asian sub-continent.
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.
Partner and Co-Head, Japan Desk
Tel: +91 22 2496 4455
Cyril Amarchand Mangaldas
Peninsula Chambers, Peninsula Corporate Park
Lower Parel, Mumbai – 400 013