How India’s Economic relationship with Japan evolved in the Cold War era when India followed a Mixed Economic Model

The evolution of Japan’s post War relations with most Asian countries was largely governed by two factors: the legacies of the Second World War and the compulsions of the Cold War. The impact of these factors was particularly pronounced in her dealings with the Southeast Asian countries and the prolonged negotiations for just and adequate reparations during the 1950s and 1960s reflected the intensity of their antipathy towards Japan.
Cold War considerations further complicated the normalization of their relations. While the Southeast Asian region posed formidable diplomatic challenges to Japan, South Asia provided a soothing contrast. South Asian countries could view the entry of Japan to the community of nations with considerable sympathy, since they had not experienced the severity of Japan’s military rule during the Second World War.
India- Japan Trade Relations date back to the post World War II era and the Cold War times when India was following a mixed economic model. Japan resurrected herself from the debacle of the Second World War with the help of India’s iron ore export. Japan reciprocated this favour by providing yen loans to India in 1958–the first of its kind, by the Japanese government. Incidentally since then, Japan is India’s largest aid donor.
The advent of the Cold War highlighted the striking contrasts between India and Japan. As India was trying to build itself into a politically recognized democracy, Japan, on the other hand, as a newly defeated nation focused on economic development, particularly through trade with Southeast Asia. As a result, Japan was able to develop a large middle class and an economy focused on technologies and its nascent auto industry, which would dominate the market for decades. India adopted the stance of championing the voice of newly independent nations in Asia, Africa and Latin America along with protecting infant industries and shunning international trade. Japan grew increasingly disenchanted with India’s idealistic Non-alignment Movement. This was because India tended to dismiss Japan as a camp follower of the United States. The general opinion in Japan was that India was a chaotic, dysfunctional and desperately poor country.
Immediately after the Cold War, India suffered from a balance of payments crisis in 1991 that provided a fresh opportunity for Japan to extend her cooperation to India. India also began the Look East policy which was designed to improve its ties with the Southeast Asian and East Asian countries, ASEAN countries and beyond. However when India conducted a series of nuclear tests in Pokhran, Rajasthan in May 1998, Japan reacted strongly to them. All political exchanges and even economic assistance was frozen for nearly three years causing a setback to Indo-Japan bilateral ties.
Nonetheless, a turnaround in the ties was achieved shortly afterwards, when Japanese Prime Minister Yoshiro Mori visited India and called for a global partnership to improve relations. Later in 2006, during the visit of Prime Minister Manmohan Singh to Tokyo, the two Prime Ministers decided to enter into a strategic partnership as the largest and most developed democratic countries in Asia.
Since 1952, Japan and India have maintained trade, economic and technical cooperation. After the Second World War, the focus of Japan’s economic relation with India shifted from the pre-war import of cotton to the import of iron ore. Japan was undergoing a process of rapid modernization that required a high amount of raw materials, which was supplied by India. The 1980s marked the start of a new phase in Indo- Japan relations with the establishment of the Maruti-Suzuki plant to manufacture cars in India.
In 1958, Japan participated in the Consortium Meeting of India’s creditor countries hosted by the World Bank and embarked on assistance programs for India that has continued till date.
Since 1986, Japan has been India’s largest aid donor. In 2009, Japan granted a loan of 137.028 billion yen (Rs. 7158.32 crore), which is the largest single ODA (Official Development Assistance) grant given by Japan to any nation. Japan has long been actively assisting India, primarily in the form of ODA, for upgrading India’s infrastructure, elimination of poverty through public health programs, medical care, agricultural, rural development , population, AIDS countermeasures and support for small business enterprises. Japan has funded few of the major infrastructural development activities. It provided a loan of 341.087 billion yen for the Delhi Mass Rapid Transport System Project, Japan further funded 19,817 million yen for the Simhadri Thermal Power Station Project. The total ODA loan commitment from Japan in Financial Year 2008 came to 236.047 billion yen. With this, India continues to be the largest recipient of Japan’s ODA.
Japan has always been looking to boost trade and investment ties in India. The reasons behind this interest in India are obvious. India offers a large domestic market base. Besides, the mutual synergies between businesses in the two countries are driving initiatives. Japan is a relatively labour scarce, capital abundant country that complements India’s rich spectrum of human capital. Also, India’s abundance of raw materials and minerals matches well with Japan’s capabilities in technology and capital to produce knowledge-intensive manufactured goods. Thus Japanese small and medium enterprises have begun to discover India as the new growth market. Japan and India share the common vision for the world. This is aptly illustrated by the fact that there has been an increase in the number of joint declarations, delegation visits and other business events between the two countries.
Since the late 1950s Japan imported iron ore from India and exported machinery and metal products to India. In the mid 1960s, import of iron ore from India was for Japan. Japan’s steel industries grew phenomenally by utilizing the Iron Ore imported from India. Since late 1960s Japan’s ODA to India shifted from project aid to non- project aid such as commodity aid and debt rescheduling. Total volume of ODA also declined. Japan’s ODA focused on Southeast Asia rather than India. In 1981 India received 5 billion dollar as long term loan from IMF. India started partial economic liberalization under IMF program. India-Japan Economic Relations in 1980 was backed by the success of Maruti Udyog in 1983. Maruti started the production of passenger cars- the mainstay of Japan’s ODA to India when, in 1984, Prime Minister Nakasone visited India. They decided on an increase in the total amount of ODA and also in the number of project aids. Since July 1991 India started economic globalization and has thus achieved sustainable high economic growth ever since.
The “Free and Open Indo-Pacific” strategy Japan has pushed in recent years is another topic of debate. Japan outlined its concept for achieving peace and prosperity by strengthening connectivity between the Indian and Pacific oceans, and between Asia and Africa. The Japanese government has currently positioned economic cooperation with a particular focus on infrastructure development along with strengthened connectivity as the centerpieces of this strategy. In November last year, the diplomats of Japan, the United States, Australia and India met for a quadrilateral dialogue. The grouping of the four “like-minded” democracies, US, japan, Australia and India – known as the Quadrilateral Security Dialogue or Quad – was first mooted by Japanese Prime Minister Shinzo Abe in 2007,but the idea was dropped after Beijing protested. It made a sudden comeback when senior officials from the four nations met in Manila on November 11 – on the sidelines of regional summits during US President Donald Trump’s maiden tour to East Asia. It is too soon to say whether the Indo-Pacific strategy will be seen only as an effort led by Japan to tighten the noose around China. The Indo-Pacific strategy includes many elements, because for Japan, it is a concept to achieve broad-ranging, long-term goals such as finding a regional order that works not only for Japan but for other countries in the region as well.
At present Indo-Japanese economic relations are exhibiting a new surge. The present day importance and future prospects of India for Japanese companies are well understood. India has the fastest growing middle class society in Asia, expected to grow by almost 20% in the next five years. The Japanese economy is highly advanced, with the service sector accounting for 68% of the GDP. The industrial sector, once the engine of Japan’s growth, now contributes only 30 percent of the GDP, while the agricultural sector accounts for 1%. Similarly the service sector is the largest contributor to India’s GDP, accounting for 52% while agriculture and industry contribute 18% and 30% respectively. The two countries therefore, share a similar trajectory, especially regarding their reliance on the service sector. In recent years, India and Japan have strengthened bilateral ties through new initiatives and programs ranging from economic and cultural linkages to defense and security.

The Comprehensive Economic Partnership Agreement (CEPA) between India and Japan was signed on 16th February 2011 and came into force on 1st August of the same year. This was a major step in enhancing bilateral relations and also to promote the economic rise of Asia. While in trade it would be beneficial to both the countries and particularly for India, Japan would find it easier to invest in India and cater to the huge domestic market as well as use it as a manufacturing hub with the help of cheap labour. Further, mutual collaborations in many important sectors such as energy, research and development etc. would be beneficial for both the economies.

India’s ambition to produce clean nuclear energy depends heavily on Japan as its manufacturers provide essential parts of nuclear reactors to USA, France and other nuclear equipment suppliers group. The improved cooperation would open up new opportunities to both countries in every sphere that are essential for harmonious growth of Asia.

Thus, we can observe that Japan has been the backbone of the Indian economy post the Second World War and during the era of the Cold war. It has forwarded huge loans to India which follows a mixed economic model and has thus helped in the structuring of the economy and the partial development of the country has a whole. It has played a great role in trade and commerce, imports and exports, employment and technology and manufacturing. Japan has helped finance many infrastructural projects, notably the Delhi Metro system. Apart from engaging in bilateral trade, the two countries are also guided by common cultural traditions and are the largest and oldest democracies of Asia having a high degree of congruence of political, economic and strategic interests. They view each other as partners that have responsibility for and are capable of responding to global and regional challenges.

-Srishti Maitra

Intern, AGA

16.02.2019