Japan has been pioneer in boosting automobalization in India, which has now become one of the important pillars for modern Indian economy. Hitherto India was dependent on a natural resource base industrial economy. Japanese investment, particularly in the automobile industry, transformed the economy into being technology oriented. This was subsequently followed by IT software development in the country. Japan became the second and third biggest foreign investor during the five years ending 2019-20. Against these backdrops, the sudden downswing in Japanese investment thereafter has raised eyebrows, plunging to half of its average flow in the preceding year. Japanese investment fell by 39.6 percent in 2020-21, which was one of the steepest drops in foreign investment in India. The reasons attributed to the fall were the COVID 19 pandemic and the lockdown in pan India.
In contrast, total FDI surged in India during the COVID 19 pandemic. It increased by 19.3 percent in 2020-21. The sole reason for growth was USA investment, which increased by 227.3 percent in 2020-21, followed by UK with 43.6 percent. The spur in US FDI was mainly due to Google’s flow of equity capital in digitization in India. This foretells India’s new generation as a technology oriented economy, which the USA and UK could cope with India’s new vision, while leaving Japan on the back foot.
The contrast in foreign investment trajectory has perplexed the observers. Why has Japan, known for its hegemony in technology and a cash rich nation, refrained from investment in India, while other major investors were resilient to COVID 19 and the lockdown? The paramount reason was Japanese aversion to digitization, the observers argued.
Even though India’s GDP growth crashed during the pandemic, the opportunity in digitization perked up in service industries as they were COVID 19 resistant. India can create US$1 trillion of economic value by 2025 using digital technology, according to a McKinsey survey. The potential sectors are 100 Smart City projects, health care services, financial services, E- Commerce, logistics, agriculture and skills development.
India is the second largest digitized economy among 17 leading economies, according to McKinsey survey. It has more than half a billion internet users , next to China. It constitutes nearly 1.2 billion mobile phone subscribers and 14 percent of total apps installations in the world. India emerged as the third largest start-ups ecosystems in the world. It has 82 Unicorns ( a start-up with a valuation of US 1 billion).
Against the backdrop of new emerging technology oriented global economy using digital technology, particularly after the COVID 19 pandemic, Japan lagged the spirit of digitization. It ranked 27th in digital competitiveness and 22nd digital talents, according to the McKinsey survey. It has single digit penetration in digitization. The scoreboard of Japanese digitization reveals single digit penetration. In e-commerce, it was at 9 percent, as compared to 24 percent in China. In healthcare, such as telemedicine penetration, it was 5 percent and in mobile banking it was 6.9 percent , according to McKinsey survey.
The barriers to digitization in Japan were poor commitment and understanding among senior managers, lack of digital talents, clashes between conventional and digital technologies and lack of support from senior management. Japan is an exclusive society where the business management is entrenched by old corporate culture. Loyalty to the corporation, life long employment resulted in the promotion of senior mangers by seniority. Eventually, thepoor adaptability of digitization among the senior managers arrested the spirit of digitization. In addition, foreign talent is abhorrent to Japanese corporations.
Globally, Japanese investment plummeted during the pandemic. Excepting a few nations in Europe, Japanese investment nosedived in major destinations of overseas investment like in the USA, China, Germany, Switzerland. COVID 19 and the US-China trade war became double whammy for Japanese investment abroad. Japanese companies witnessed a dent in production, owing to the lockdown and US-China trade conflict. Eventually, this led to supply chain disruption in Japan and overseas .
The recovery is expected by 2023, according to a JBIC survey (Japan Bank for International Cooperation). The expected promising areas for Japanese overseas investment over the three years are China, followed by India, according to the survey. In ASEAN, Vietnam will emerge a new area for Japanese attraction.
The survey revealed that Japanese companies intend to continue investment in supply chain during their recovery, leaving digitization at bay. Nevertheless, the noteworthy feature is that Japanese investors intend to undergo a reorganization of the supply chain by shifting to “local production for local consumption type network“. This augers well for India as the Indian government launched a new policy for reshaping Make in India for domestic consumption by domestic production. It revisited PLI (Production Link Incentive) scheme and launched the new version in April 2021. PLI grants incentive to the manufacturer on incremental sales for the initial 5 years.
The moderated PLI scheme is an extended list covering 13 industries. Hitherto, it included just three industries. Of these, automobiles, electronics, telecommunication and pharmaceuticals should be of Japanese interest. The current PLI scheme is not new. The origin of the scheme can be traced back to the Phased Manufacturing Programme (PMP) in electronics in 2015-16.
The Electronic industry has experienced rapid growth since then. PLI was one of the important factors to this growth trajectory. Production of electronic goods increase by over 28 percent during the past three years, with an average annual growth of 9.3 percent.
Author: Subrata Majumder
Subrata Majumder is a former adviser to Japan External Trade Organization (JETRO), New Delhi, and the author of “Exporting to Japan,” as well as various articles in Indian media, including Business Line, Echo of India, Indian Press Agency, and foreign media, such as Asia Times online and Eurasia Review.