By Subrata Majumder
Japan has been a pioneer to boost automobilization in India. It has now become one of the important pillars for modern Indian economy. Hitherto India was dependent on natural resource based industrial economy. Japanese investment, particularly in automobile industry, transformed the economy into technology oriented. It was subsequently followed by IT software development. Japan became the second and third biggest foreign investor during the five years ending 2019-20. Against these backdrops, sudden downswing in Japanese investment thereafter raised eyebrows. It plunged 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 COVID 19 pandemic and lockout in pan India.
In contrast, total FDI surged in India during COVID 19 pandemic. It increased by 19.3 percent in 2020-21. The sole reason for growth was USA investment. It increased by 227.3 percent in 2020-21, followed by UK with 43.6 per cent. 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 of technology oriented economy, which USA and UK could align with India’s new vision, while leaving Japan at the back foot.
The contrast in foreign investment trajectory perplexed observers. Why has Japan, known for its hegemony in technology and as a cash rich nation, refrained from investment in India, while other major investors were resilient to COVID 19 and lockdown? The paramount reason was Japanese aversion to digitization, observers argued.
Even though India’s GDP growth crashed during 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 skill 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 nearly1.2 billion mobile phone subscribers and14 percent of total apps installations in the world. India emerged third largest start-ups ecosystem 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 Corona 19 pandemic, Japan lagged the spirit of digitization. It ranked 27th in digital competitiveness and 22nd digital talents, according to 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 per cent 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 corporate, life long employment and job hoping being considered unethical resulted in the promotion of senior managers by seniority. Eventually, poor adaptability of digitization among the senior managers arrested the spirit of digitization. In addition, foreign talent is abhorrent to Japanese corporates.
Globally, Japanese investment plummeted during pandemic. Excepting a few nations in Europe, Japanese investment nosedived in major destinations of overseas investment like in USA, China, Germany, Switzerland. Covid 19 and US-China trade war became double whammy for Japanese investment abroad. Japanese companies witnessed dent in production, owing to 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 intended to continue investment in supply chain during their recovery, leaving digitization at bay. Nevertheless, the noteworthy feature is that Japanese investors intended to undergo reorganization of 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 initial 5 years.
The moderated PLI scheme is an extended listcovering13 industries. Hitherto, it included3 industries. Of these, automobile, electronics, telecommunication and pharmaceuticals should be of Japanese interests. The current PLI scheme is not new. The origin of the scheme is traced back to Phased Manufacturing Programme (PMP) in electronics in 2015-16.
Electronic industry made rapid growth since then.PLI was one of the important factors to this growth trajectory. Production of electronic goods increased by over 28 percent during the past three years, with an average annual growth of 9.3 percent. (IPA Service)
The writer is former Adviser, Japan External Trade Organization (JETRO), New Delhi
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