India needs both Japan, China for growth

The Prime Minister of Japan evidently had a good visit. In recent months, there has been a determined effort by Japan and its friends resident in India to bring these two Asian giants closer, to close ranks against the third and increasingly assertive Asian giant. The Doklam crisis gave Japan a great opportunity to win goodwill in India and it seized the opportunity with both hands by becoming one of the two countries that openly supported India during the standoff.

Suddenly editorials and commentaries are waxing eloquent about a new strategic relationship to counter China. We may be jumping to conclusions a bit too hastily. Many observers relate this to extending the date by a month from September 17 to allow a new bidder into the fray. This ostensibly is to allow the Japanese combine of Mitsubishi and Kawasaki to bid by offering their Soryu-class submarines. It is Japan’s largest and first air-independent propulsion submarine. Indian naval officers who have been aboard them say it is state of the art. The Soryus are also very expensive.

But going by the experience of the acquisition of ShinMaywa US-2 amphibious aircraft for the Indian Navy, it is too premature to believe that this relationship will really go beyond statements and self-serving economics. At the very last moment, Japan decided that only the US-2 without its weapons and electronic suite could be sold, as Japanese laws will not permit it to be exported to India. The Soryu-class submarine is a lot more lethal, so unless both countries scale down their legal barriers substantially, this particular “strategic” relationship is not really going anywhere.

The geopolitics and geographies of the two countries are entirely different. A deep sea separates Japan and China. Japan is also a treaty ally of the United States and is protected by the US’ great military presence. India on the other hand shares a long contested border with China and has over a quarter of a million heavily armed troops and a huge and modern Air Force deployed against an equally powerful PLA. At many places, the forces are eyeball to eyeball. War is a hair trigger away and this is no Kabuki play. The big question for India is whether it wants any part in this drama?

The scars that blight relations between Japan and China are old and deep ones, and even their being close economic partners have not erased them. India will do well to skirt away from this conflict and focus on serving its own interests.

For two countries that so distrust each other, Japan and China do a lot of business together. Total trade between China and Japan was almost $303 billion in 2015. By contrast, Indo-Japanese bilateral trade is a little under $13.5 billion. China imports more from Japan than any other country, and many of those goods are indispensable to China’s economic advance — high-tech components to fuel its export machine and capital equipment for its expanding industries. Since 2000, the total Japanese FDI has been almost $1 trillion, of which $122.4 billion was in China. During the same period, the total Japanese FDI in India was about $25.7 billion.

India has a propitious demographic window from now till about 2060, when it must transform itself into a modern and prosperous nation. After that the demographic situation will start turning adverse, with an ageing population and an increasing dependency ratio. So not only is time money, but money is also time. But we need to look for credit to build our nation.

Right now the only countries with the cash reserves to be bankers to India’s plans are China and Japan. China has reserves amounting almost $4 trillion and Japan has a little more than $1 trillion. Only they can lead to the fruition of many of our plans. The kind of investment India needs to build its infrastructure are huge and of a very long-term nature. The private sector is not capable of such long-term investments.

It is, therefore, the governments of both countries that India needs as economic partners. The kickoff of India’s first high-speed railway linking Mumbai and Ahmedabad with Japanese technology and engineering, and fully financed by Japan at a low interest rate of just 0.1 per cent, is a typical instance of Indian expectations. India, however, is not open to the kind of Chinese high-cost investments made in Sri Lanka and being planned in Pakistan. India will not pick up the tab for pump priming Chinese industry. India has far too much experience with foreign assistance not to look at gift horses in the mouth.

Both China and Japan made it big by accessing the US market with their competitive advantage. They exported cheap and earned great wealth. India is hamstrung with archaic labour laws and a relatively unproductive labour ethos. And it hobbles along as a high-cost producer. It cannot become an economy built by trade surpluses. It still needs huge infusions of capital to transform it into a middle-class society.

In the present scheme of things, the United States is too broke to provide India with capital. It offers India a “partnership” high on rhetoric and low on substance. India needs partners who can put money where their mouths are. For now, only China and Japan can provide the economic partnerships India needs. We need not make a this-or-that choice. We can offer both of them investment destinations for their huge reserves, which at present earn them very little.