Economic ties between India and Japan while growing in the recent years are still far below their…

Question

Economic ties between India and Japan while growing in the recent years are still far below their potential. Elucidate the policy constraints which are inhibiting this growth.

Ghissu Editorial · Accepted Answer

India-Japan economic ties lag their potential because of Indian policy frictions, such as retrospective tax, land and labour hurdles and weak infrastructure, and Japanese ones, such as non-tariff barriers and nuclear and arms export curbs. Bilateral trade stayed below US$ 20 billion in 2012-13 despite the 2011 CEPA.

**Introduction**

Despite CEPA (2011) and Japan's role as India's largest bilateral aid donor, bilateral trade stayed below US$ 20 billion in 2012-13, a sliver of Japan-China trade. Complementarity is high; policy frictions on both sides hold growth back.

**Constraints Rooted in India's Policy Climate**

1. **Regulatory Unpredictability**: The 2012 retrospective tax amendment after the Vodafone ruling signalled that settled positions could be reopened, which alarmed risk-averse Japanese investors.
2. **Land and Labour**: Land acquisition delays slowed the Japan-backed Delhi-Mumbai Industrial Corridor, and the 2012 Manesar plant violence at Maruti Suzuki raised labour concerns.
3. **Infrastructure Gaps**: Power shortages, poor freight logistics and port delays raise costs for the just-in-time supply chains Japanese manufacturers run.
4. **Sectoral FDI Caps**: 26% ceilings on foreign stakes in insurance and defence in 2013 denied Japanese firms the control they sought.

SKETCH: fishbone | Why Trade Stays Below Potential
effect: Below-potential ties
- Retrospective tax
- Land and labour
- Weak logistics
- Japanese drug rules
- No nuclear deal
- Arms export ban

**Constraints on the Japanese Side and in CEPA**

1. **Non-tariff Barriers**: Japan's strict drug approval and food safety standards blunted CEPA's tariff cuts for Indian generics and farm goods, keeping Indian exports narrow and petroleum-heavy.
2. **Nuclear and Defence Curbs**: Without a civil nuclear deal in 2013 and with India outside the NPT, Japanese reactor suppliers stayed out, while arms export curbs stalled the US-2 aircraft talks.

**Conclusion**

Stable tax rules, land and labour reform, a nuclear pact and CEPA review of non-tariff barriers can unlock the tie and turn complementarity into trade. The 2016 nuclear agreement and over 100 Japanese capability centres in India by 2026 (Deloitte) show what follows when the constraints ease.

Economic ties between India and Japan while growing in the recent years are still far below their potential. Elucidate the policy constraints which are inhibiting this growth.

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