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Japanese companies have long been cautious about investing in India outside the motor vehicle industry.

In a reflection of this tentative approach, there are only about 350 Japanese companies active in India compared with some 30,000 in China, according to an official at the Japanese embassy in New Delhi. But corporate Japan is now aggressively seeking a bigger role, a development underscored by a high-powered Japanese trade mission to Delhi last week that produced pledges of closer ties between the two countries.

The delegation highlighted the ambitious Delhi-Mumbai Industrial Corridor (DMIC), a $90bn project to develop the 1,483km swath of land between the country’s political and financial capitals.

Conceived by Japan and India six months ago, the corridor will wind through six states and include industrial zones, sector-specific investment regions, a 4,000 MW power plant, ports and several airports as well as brown field and green field development.

“Japan will provide all possible assistance for DMIC as the project will trigger a new industrial revolution in India,” promised Akira Amari, Japan’s minister of economy, trade and industry during his five-day visit.

Japan’s investment plan has not been finalised. But Indian trade minister Kamal Nath last week said he expected Japan to contribute about $10bn over the next five years. That sum would be comprised of foreign direct investment from Japanese companies, government loans and Japanese depository receipts that would be floated on the Tokyo markets by Indian listed companies.

The DMIC has been planned to run alongside large highway projects and a rail freight corridor also in the works that would shuttle goods to and from seaports. Several large cities will link to the corridor, including Jaipur, Ahmedabad and Pune.

The industrial corridor would help further India’s goal of boosting manufacturing and exports. “Japan is building a platform where India can become the gateway of exports to the UK, Middle East and Africa,” said Mr Amari.

He highlighted potential business opportunities for small and medium-sized Japanese enterprises in the corridor, though his delegation represented a who’s who of Japanese corporate heavyweights.

Accompanying Mr Amari were the heads of Suzuki Motor, Honda Motor, Mitsui, Hitachi, NEC and the Tokyo Stock Exchange and the president of Sony.

Mr Nath said the DMIC is at “an advanced stage of finalisation”. The first phase is expected to be completed by 2012 and the rest by 2016.

The business mission comes ahead of a visit to New Delhi by Japanese prime minister Shinzo Abe scheduled for late August. Mr Abe previously stated it is “of crucial importance to Japan’s national interest that we further strengthen our ties with India” and suggested that ties could overtake relations with the US and China in importance within 10 years. Tokyo is striving to build up India’s potential as a strategic partner to help balance China’s might in the region.

In some sectors, however, Japan is playing catch-up with rivals who have firmly established a foothold over the past decade. South Korean manufacturers Samsung and LG, for example, have captured a large share of the growing Indian consumer electronics market while Japanese companies have lingered on the sidelines.

In a scramble to make up lost ground, Japan’s electronics industry association last year signed a memorandum of understanding to explore collaboration with its Indian counterpart.

For Japan to expand its heavy industries in India, it needs sound infrastructure. This is a core motivation for the DMIC. “IT is booming in India but IT doesn’t need good infrastructure,” says an official at the Japanese embassy in New Delhi.

Japan’s confidence in India has been bolstered by collaboration on development of Delhi’s successful mass transit system. About 60 per cent of its financing came from loans from the official Japan Bank of International Co-operation and Japanese companies such as Mitsubishi won key contracts.

Contrary to expectations, the metro was completed in 2002 within budget and almost three years ahead of schedule. Japan is now helping fund a 122km extension scheduled for completion by 2010.

Japan has invested in India’s automotive industry for more than two decades, fostering successes such as Maruti Udyog, a joint-venture majority owned by Suzuki that is India’s largest passenger carmaker.

Gurpal Singh, director general of the Confederation of Indian Industries, last week said he expected FDI from Japan to reach $3bn this fiscal year.

That would be a tremendous turnaround as, according to government statistics, Japan was the source of just $85m FDI in the fiscal year ended in March, down dramatically from $208m the year before.

Over the last four years combined, Japan was the fifth largest FDI source, behind Mauritius, the US, UK and the Netherlands. (Mauritius is a popular tax haven through which many Indian companies invest.)

Plans for the DMIC are still vague.

Public discussion of the project has neatly skirted around the controversial subject of “special economic zones”, which have met resistance this year from farmers protesting development of their land. The DMIC would likely include several SEZs.

Approval of new SEZs has been stalled for months while the government reconsiders compensation policies for displaced farmers.

Some wonder whether India and Japan can pull off the DMIC project.

“In my preliminary view, it looks bigger in conception than what is feasible,” says V. Ranganathan, a professor specialising in infrastructure at the Indian Institute of Management, Bangalore.

Ajay Dua, secretary in the Department of Industrial Policy and Promotion, however, dismisses concerns over land development policies.

He says land would only be appropriated for infrastructure and not for private use.

An official at Japan’s embassy in New Delhi also puts aside political uncertainty as a worry. “How to attract Japanese investors – this is the biggest challenge,” he says.

S. Chandrasekharan, director of the South Asia Analysis group, says: “Japan was a late entry into India so there hasn’t been that much investment.

“Now we’re seeing a change of heart.”

Copyright The Financial Times Limited 2017. All rights reserved.
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