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PM’s visit to Japan: CEPA will transform India-Japan Ties

Rajaram Panda was Senior Fellow at the Institute for Defence Studies and Analyses, New Delhi. Click here for profile
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  • October 29, 2010

    The just-concluded visit of Prime Minister Manmohan Singh to Japan is going to catapult India-Japan bilateral ties to a higher trajectory, if the economic, security and political dimensions of the relationship are seen in tandem. Progress in these areas has been slow, no doubt, but the commitments and sincerity by both sides should be kept in mind. That is why the joint statement issued by both the Prime Ministers was appropriately worded “Vision for India-Japan Strategic and Global Partnership in the Next Decade”. This means both have a long-term horizon in mind.

    Prime Minister Singh’s visit to Japan, Malaysia and Vietnam, in that order, is a demonstration of India’s resolve to pursue and deepen its “Look East Policy”. That Singh’s pursuance of India’s “Look East Policy” got priority over his subsequently cancelled visit in September for the UN General Assembly in New York is a testimony to Singh’s prioritizing India’s increasing regional profile, as he could have very well held bilateral discussions with world leaders in New York.

    Indeed, India-Japan bilateral ties are deepening, albeit slowly, vis-à-vis, for example between India and South Korea, but the future is not bleak. Both governments have kept their commitment since 2004 to hold annual summit-meetings alternating between New Delhi and Tokyo without any interruptions. Indeed, Prime Minister has visited Japan four times as Prime Minister. Despite the fact that there was a different Prime Minister each time PM visited Japan, Japan’s policy towards India remained the same, whether the government was under LDP or DPJ rule.

    Today, Asia is driving the global economic engine. There is sluggish demand in the developed world because of recession. Protectionist tendencies have reared their ugly heads. Successive governments in Japan are embroiled in tackling burning problems such as a shrinking work force, mounting public debt and prospects of prolonged deflation with no immediate solution on the horizon.

    At the same time, its high domestic savings, $5 trillion economy and huge current account surplus endow Japan with the cushion to emerge from its economic ills. It is, therefore, premature to write Japan’s economic obituary after it was overtaken recently by China as the world’s second largest economy.

    India’s economy is buoyant, population young, and market large. The Indian economy has been growing at an average of 7 to 9 per cent and is scouting for alternative markets and business opportunities. If honed with Japan’s technology, manufacturing acumen and financial resources, this will create a win-win situation for both. This way, both will be able to synergise their “complementary strengths to impart momentum to Asian as well as global economic growth and prosperity”. The second phase of India’s Look East Policy aims to achieve just that. Against this background, India-Japan ties are appropriately positioned for take-off.

    The significance of Prime Minister Singh’s visit to Japan can be seen in four areas: conclusion of four years of negotiations on a Comprehensive Economic Partnership Agreement (CEPA), deciding to speed up negotiations on a civil nuclear deal, simplifying visa procedures, and finding common ground for convergence of interests in securing peace and stability in Asia.

    CEPA is broader than a free trade agreement because it includes steps to promote greater investment and also addresses intellectual property rights.

    India is uncomfortable with the fact that the balance of trade is heavily tilted in favour of Japan. The bilateral trade is not only unbalanced but is also at a low threshold. For example, in 2009-10, while India’s exports to Japan stood at $3.63 billion, its imports were almost double at $6.73 billion.

    The CEPA will help address this imbalance and Japan will have to reduce tariffs on 97 per cent of Indian imports, and India will have to reduce tariffs on 90 per cent of goods imported from Japan over the next decade. Japan will get greater market access for most industrial goods, as well as several agricultural products such as durian, curry, tea leaves, lumber, shrimp and shrimp products. India will get improved market access in Japan in auto parts, steel panels, and other industrial materials, as well as DVD players, video cameras and industrial machinery.

    Negotiations on the conclusion of a CEPA had been prolonged for four years and over a dozen rounds. This time Prime Minister Singh and his counterpart Kan Naoto committed to sign the agreement at the earliest at ministerial level on completion of necessary formalities. CEPA encompasses trade in services and investment besides covering 90 per cent of trade in merchandise goods and will boost trade and investment between the two countries. The pact will help Mode 4 services involving movement of persons such as nurses and care givers, information technology professionals, and promote tourism. To take effect, the deal needs ratification by the Japanese Diet, not expected before mid-2011.

    Apart from CEPA facilitating growth in bilateral trade, it will open new fronts for increased investment from Japan in Indian ventures. So far, much of Japanese investments in India come through mergers and acquisitions. In 2008-09, for example, Daiichi Sankyo’s acquisition of Ranbaxy for $4.2 billion and NTT DoCoMo’s purchase of 26 per cent stake in Tata Tele for $2.7 billion, accounted for over four-fifths of total FDI of $8.5 billion.

    CEPA will enable greater participation of Japanese industry in Indian industry by creating capacities in manufacturing and infrastructure sectors and will also facilitate freer flow of high-end technologies. India has a target of mobilizing over US$1 trillion for infrastructure development projects in the next five years and expects Japan to bring in a substantial part of this funding.

    Japan’s contribution towards building economic and social infrastructure in India is already noteworthy and there is huge prospect for increased Japanese investment in sectors such as energy development, urban transport, water supply and waste management where Japan has competitive edge and expertise.

    Japanese ODA in the Delhi Metro project has transformed the transport network in the capital city. Japan’s commitment of ODA assistance to similar metro projects in Kolkata, Bangalore and Chennai will be a huge boost to urban transport development in these three cities. Also, the Delhi Mumbai Industrial Corridor (DMIC) and the Dedicated Freight Corridor project between Delhi and Mumbai with ODA support will transform India’s freight logistics. When completed, the $90 billion DMIC project will give India a state-of-the art manufacturing and exporting base that will also dramatically transform India-Japan ties.

    The two countries began talks on a civilian nuclear deal in June 2010 but the subject is too sensitive in Japan because India has refused to adhere to the NPT and CTBT as it considers them discriminatory, even though India has voluntarily suspended nuclear testing. In late 2009, Prime Minister Singh said that India’s position on the CTBT could change if Beijing and Washington were to join the pact. China, India and the US are three of the nine “Annex 2” states that must ratify the treaty for it to enter into force.

    Japan may modify its position as the willingness to continue negotiations again in late November demonstrates. Japan may be willing to accept an agreement between the two on the quantum of penalty that Japan can impose on India if the latter were to carry out a new nuclear test after a trade deal was enacted.

    Anti-nuclear sentiment however runs high in Japan and though the political leadership has the willingness to open nuclear commerce with India, it is not in a position to take domestic constituencies on board. Bureaucratic hurdles too come in the way, but exporting nuclear power generation technology and related equipment to energy hungry India by recession ridden Japan will be a “win-win proposition” for both sides.

    Japan thus agreed to start negotiation with India on a framework for the peaceful transfer of nuclear power technologies to India. Prime Minister Kan agreed to speed up negotiations, while seeking India’s understanding for Japan’s sentiments. Both leaders agreed that civil nuclear energy can be a mutually beneficial area for cooperation. India welcomes Japanese firms to participate in the expansion of its nuclear industry for peaceful purposes.

    Apart from bilateral issues, both agreed to cooperate in various other fields, discussed the situation in Afghanistan and ways to combat climate change and push for UN reforms. As regards China, Singh and Kan agreed to keep dialogue with China open and transparent. Keeping China engaged through productive dialogue and developing structures of cooperation was agreed as the desirable option. There was agreement between the two leaders that maintaining peace and stability in Asia is of utmost importance and both showed commitment to work on that.