The recent spurt in the Japan-China conflict over the contested islands, Senkaku to Japan and Diaoyu to China, was not unexpected.
The surge in anti-Japanese sentiment in China is nothing new. The root of the Sino-Japanese conflict lies in the history of their ties. Anti-Japanese sentiment flared up in China in 2005 over the new Japanese textbooks, which seemed to gloss over Japanese war crimes.
In contrast, Indo-Japanese ties have rarely been hindered by political conflict, except when India went for nuclear testing. In fact, Japan has proved to be India’s true bilateral economic partner over the years.
Can the resurgence of anti-Japanese sentiment in China prove to be a blessing in disguise for India? Can it divert Japanese investment to India?
It is important to note that economic ties between Japan and China deepened over the last decade, notwithstanding historical scars. The question is how India can reap the benefits, even as it cannot match Chinese infrastructure and low costs.
During the 2000s, China emerged as a favourite destination of Japanese investors. Japanese investment in China surged from a paltry $935 million in 2000 to $12,649 million in 2011.
But, the pace of growth of Japanese investment in China slowed down after the rise of anti-Japanese sentiment in China, coupled with the Lehman shock.
During the five-year period, viz, 2005-2009, Japanese investment in China remained almost flat, at around $6.1-6.5 billion annually.
STUDY IN CONTRASTS
Japanese investors have tended to compare India and China. In the triangular relationship between India-Japan-China, there are similarities and dissimilarities.
The similarities are: both India and Japan have historical enmity with China.
The other similarity is that China has become the biggest trading partner of both India and Japan, despite uneasy political relations with both countries.
In 2011-12 (fiscal year), China constituted 9.5 per cent of India’s total trade with the world. In 2011 (calendar year), China’s share in Japan’s global trade was 29.3 per cent.
What are the dissimilarities? Politically, China is a communist country, whereas both India and Japan are democracies.
Second, both Japan and China are at a demographic disadvantage. The proportion of the working population in both countries is falling because of an aging society in Japan and the one-child policy in China.
Third, India’s economic growth is less export-based than that of Japan and China.
INDIA’S CHANCES
Factors that are likely to dampen China’s attractiveness are: rise in wages; its high rates of economic growth becoming less sustainable on account of global turmoil; an aging society due to the one-child policy and its impact on the savings rate; and imbalances between the investment of SOEs (State-Owned Enterprises) and private sectors.
These factors could affect foreign investment in China.
Notwithstanding India’s gloomy economic situation in fiscal 2011-12, global investors are optimistic about India in the long term. The encouraging rise in overall FDI in the post-Lehman crisis period portrays India as an attractive destination for Japanese investors.
Total FDI in India ballooned to $46,847 million in fiscal 2011-12, a growth of 86 per cent over the previous year.
Japanese investment, too, participated in this surge. It grew by 90 per cent, amounting to $2,972 million in fiscal 2011-12. This means India has not yet lost its appeal as a global destination for foreign investment.
Some cases will further evidence Japan’s growing interests in India. While Japanese electronic giants are plunging into the red in Japan, their India operations are thriving. Sony’s India Head was in ecstasy over its healthy growth in fiscal 2011-12. Sony’s India operations are the sixth largest for Sony globally.
Sony is planning to make India its fifth largest operation in fiscal 2012-13, and increase employment from 3,000 to 3,800 by March 2013. Similarly, the Indian arm of Panasonic notched a 72 per cent growth in fiscal 2011-12.
The uncertainty over China’s faster growth presents both a challenge and an opportunity to India to attract Japanese investment. China continues to be the top competitor to India for foreign investment. Yet, India’s strong fundamentals, that is, strong domestic demand, can strengthen its position vis-a-vis China.
In contrast, China relies more on exports, which are sagging due to global recession. Chinese manufacturing is up against a rise in wages and high production costs. India, too, faces rising wages.
But the upsurge in domestic demand and high import tariffs insulate India from global turmoil.
During 2011-12, Japan leapfrogged to becoming fourth biggest foreign investor in India, from ninth position in fiscal 2008-09.
And, if we do not count Mauritius as the top investor, Japan would be in third place in 2011-12. Mauritius is not comparable with other investing countries, as larger investors from Mauritius are other than Mauritian nationals.
It accounted for 7 per cent of the total FDI inflow during April 2000 and March 2012. According to an Ernst and Young survey, during fiscal 2010-11, Japan emerged as India’s second largest investor, in terms of number of projects and employment generated.
At present, anti-Japanese sentiment in China has assumed serious proportions. It might become difficult for China to preserve its strong economic ties with Japan in this scenario.
India can emerge as an alternative destination for Japan’s investment.
With strong economic fundamentals, a huge workforce coupled with a sizeable skilled pool, and a large scope for investment in infrastructure, India’s potential to attract Japanese investment should not be discounted.
Externally, its strong foothold in BRIC (Brazil, Russia, India, China) — the next arm of global economic growth and its rising relationship with Africa — may unleash a strong arm for Japan to establish its global partnership.
(The author is Adviser, Japan External Trade Organisation (JETRO), New Delhi. Views are personal)