By Subrata Majumder
India has emerged as the second most attractive destination for Japanese investors in Asia, after Singapore. It surpassed China, the most attractive place for Japanese investment in Asia for over four decades. Hitherto, India was eighth in 2020 in terms of getting investment from Japan.
Latest Japanese interest in India manifests a major breakdown in Japanese confidence in China’s potential for competitiveness and adaptability to cope with Trump’s tariff war.
The USA-China tension geared up the new era of overall India-Japan relation, including economic and political dynamism, based on the legacy of Abe regime. From a mere bilateral economic relation to specific strategic relation, it shifted to defence and global partnership.
Giving thrust on Shinzo Abe’s policy for combating China’s rise in power, followed by COVID 19 pandemic, Japanese investment made a sharp downturn in China in the post Abe period. It fell from US$ 11,024 million in 2020 to US$ 3,305 million in 2024, leaving a big space for India to attract Japanese investment.
Eventually, Japanese investment in India surged five times more in the post Abe period , from US$ 1,570 million in 2020 to US$ 5,341 million in 2024 and crossed investment in China.
In ASEAN, Japanese investment witnessed an erratic trend. ASEAN has been the favoured trade block for Japanese investors both in respect of investment climate and cultural heritages, including Japanese living styles.
The noteworthy feature of Japanese investment in ASEAN is that Vietnam, which emerged as a better destination for Japanese investment in 2020 during Trump’s Presidency in the first period, rattled down to less attractive than India in 2024.
Why has India shined in Japanese investment, outpacing China and ASEAN?
Why India is shining in terms of Japanese investment overtaking China? There are three major factors which attributed to Japanese tilt towards India .They were big and fast growth in local market, spur in the growth of export of service sector and increasing global protectionism.
Growth in local market was triggered by sustainable and faster pace in GDP. During 2014-15 to 2023-24, the average growth in GDP was 6.5 percent a year, despite hindered by COVID 19 pandemic. The growth trajectory vies India’s dream to be 3rd biggest economy by 2028, overtaking Germany and Japan, according to Morgan Stanley.
Growth in India was triggered mainly by service sector, despite poor show in manufacturing sector. Service sector accounted for 55 percent of GDP in 2023-24. The average growth in service sector was 8 percent in pre-pandemic and increased to 8.3 percent in post pandemic periods.
Service sector made a boom in exports too. It sparked to 13.5 percent growth in 2024-25, against dormant growth in merchandise exports by 0.14 percent. Even during pandemic period, service exports pitched a continuous upward trend, against erratic growth in merchandise exports. Service exports accounted for nearly 47 percent in India’s total exports.
India ranks 7th in the global service exports. It accounted for 4.3 percent in global exports in 2023-24, from 1.9 percent in 2005. The unhindered growth in service sector as well as hike in exports of services leveraged higher potential for local demand market.
Given the sustainable growth in GDP, driven mainly by service sector, rural and semi-urban consumption spurred. The transformation in the financial management system and dynamism, such as expansion of banking facilities in non-urban areas and rapid growth in digitization, coupled with growth in agriculture, evoked a new era of domestic demand.
Japanese confidence in India was reinforced by local demand, geared up by service sector. According to a survey by JETRO (under METI, Government of Japan), business conditions dampened in China and Thailand. In contrast, increase in local demand boosted business confidence in India.
In JETRO survey, India took lead with 80.3 percent of Japanese investors in India considering expansion. In contrast, business expansion intention declined in Thailand and hitting record low in China. The survey revealed that India is currently the third highest making profit centre for Japanese investors followed by South Korea and Taiwan.
Local demand became the trigger for Japanese companies profitability in India. It has been forecasted that increase in local demand will be the pillar for profitability in 2025 for Japanese companies In India.
The surge in automobile industry growth was driven by local demand, unlike USA, Japan, South Korea and Germany. India is 4th biggest manufacturer of passenger vehicle in the world. It is dominated by Japanese investment. Its progress is tied with local demand. Over 90 percent of passenger vehicles produced in the country is sold in the country.
In summing up, the turnaround in Japanese investment in India underscores a significant change in the Japanese investment strategy. MOU with Rapidus Corporation of Japan, in July 2023 for the manufacture of semiconductor chips is a significant move to cling a strong economic relation between India and Japan. It was formed with the backing of Japanese MNCs, like Sony, Toyota, Kioxia, NEC, NTT and MUFG Bank. At present, India does not have any plant for manufacture of semiconductor device. (IPA Service)