Insight on India-Japan business relations
India as the fastest growing economy in the world, and Japan as the third largest economy in the world, share some common features with similar political, economic and strategic interests. The two countries also go well beyond socio-economic ties, and are steered by common cultural traditions including the heritage of Buddhism, and the commitments to the ideals of tolerance, pluralism and an open society.
After six years of consultation, India’s Prime Minister Narendra Modi’s recent visit to Japan sealed the long-pending civil nuclear agreement on the side-lines of their annual summit. This is remarkable considering India is the first non-signatory of the Nuclear Non-Proliferation Treaty (NPT) to have signed such a deal with Japan. Indian Prime Minister Narendra Modi and his Japanese counterpart, Shinzo Abe, welcomed the agreement as a historic step forward to achieve a clean energy partnership.
On the economic front, historic relations between both the countries have propelled bilateral investments and growth, introducing new market dynamics and investment opportunities between the two countries, particularly with Japan’s increasing interest in India’s young and growing market, especially providing a larger market over their aging population.
There are some long standing precedents of Japanese companies investing that have been doing so for many years. The most prominent of these is Suzuki’s venture into the Indian automobile sector as a partnership between the Suzuki Motor Company and Maruti which was encouraged by the Indian government. This has been a vast success and the company, Maruti Suzuki Limited is listed on the Bombay Stock Exchange (BSE) / National Stock Exchange (NSE) and has a market capitalisation of USD$22 billion.
There are other examples such as Hero Honda Limited and numerous companies in the auto ancillary space which followed Suzuki into India such as Motherson Sumi (25 percent owned by Sumitomo Wiring) and Sona Koyo Steering Systems (25 percent owned by Sona Autocomp Holdings and 20 percent owned by Toyota). Recently and keeping in line with Narendra Modi’s pet project ‘Skill India’, Japan has committed to train 30,000 people over the next 10 years with state-of-the-art manufacturing skills. The initiative will begin through the establishment of the Japan-India Institutes for Manufacturing (JIIMs) and the Japanese Endowed Courses in Engineering Colleges designated by Japanese companies in India.
Japan is on a mission to expand its economic presence in India. This comes as no surprise, given that India is the fastest growing economy in the world (GDP growth expected to be 7.6 percent in 2016 and 2017) with ever improving fundamentals. The current account deficit has been narrowing steadily and this has been very supportive for the Indian currency and therefore for foreign investment into India. In addition, the steady decline in inflation has allowed the cautious Reserve Bank of India (RBI) to cut interest rates while maintaining a positive real rate of interest. The decline in rates and positive sentiment has led to a rally in Indian Rupee bonds and yields have fallen.
The strong economic growth which has been boosted by the passage of economic reforms has led to higher investment inflows and the currency has performed well whilst the Dollar Rupee carry trade has been profitable. With India’s credentials and Japan’s commitment, these are exciting times for both nations and for investors who want a piece of the action.
Japanese retail investors have long been investing into Indian investment vehicles; its low-to-negative interest rate environment is well documented and India offers investors an excellent rate of return coupled with strong capital growth prospects, as India’s debt is rated Investment Grade with a reasonable expectation of an upgrade in debt rating in the medium term. This means investment opportunities in India are only becoming more attractive which is why we launched our Global Zyfin SOE Bond ETF (CURY Bond) on the London Stock Exchange (LSE) last year; we wanted to find a way to expand access to India’s AAA bonds through a highly diversified and deeply liquid strategy. The diversification of the Indian bond market is one of many initiatives being undertaken by the Government of India to attract foreign direct investment into the country. We have been receiving a positive response from Japanese Insurance companies, trust companies and mutual funds among the institutional investors who are looking at Indian Bonds with enthusiasm.
Japan is keenly observing the current business landscape of India’s investment scenario which will be a deciding factor in Japan’s future investment in India. Mr Modi’s administration has been leading change and reform to India’s tax system and tackling India’s ‘black economy’. The Indian Prime Minister has been fighting corruption and government inefficiency and has made this the corner stone of his administration. Additionally, Mr Modi is very active in putting himself and India on the world stage in order to drive investor interest and capital into India with the “Invest in India initiative” – clearly this has worked in Japan. International investors have expressed their confidence in Mr Modi via the record amount of money now entering India through direct investments or investments in the Indian equity or fixed income markets.
India and Japan are or should be natural partners. Japan’s technological and financial strength harmonises with India’s vast population and location on the world map. Japan is keen to and has in the past invested in India’s growth, making exceptions for nuclear cooperation, amending its constitution to allow strong defence relations and assistance in high-end infrastructural development. Tokyo's financial and technological strength complements India's need for both.
Both nations, quite rightly, have a positive outlook for the future. With Modi and Abe being politically secure in their current positions and their mutual realisation of the need for enhancing economic and security dealings with each other, Indo-Japan relations are no doubt set to flourish further.
Mihir Kapdia is CEO and Founder of Sun Global Investments