Indian Prime Minister Manmohan Singh’s recently concluded visit to Japan played a significant role in invigorating the Indian growth story as well as strengthening diplomatic relations in the Asia Pacific. With India investing heavily in infrastructure, Japanese assistance, both technical and financial, has been of great benefit. Indeed, Japan’s postwar experience, leading to its subsequent economic boom in the 1970s, is a success story that India should seek to emulate.
Economic cooperation between the two countries, initiated in 1958, has held strong ever since. The cooperation began with an Official Development Assistance (ODA) loan, the first ODA Japan ever extended to any country. More recently, India has been one of the largest recipients, if not the largest, of Japanese ODA for the past several years, amounting to approximately 3,600 billion yen ($36 billion). This significant amount has helped India make strides in infrastructure development.
The most popular infrastructure project to have been funded by the Japanese is undoubtedly the Delhi Metro. The project was initiated in March 1995 and had capital investment for Phases I and II of $2.7 billion, of which 60 percent was financed through a loan from the Japan International Cooperation Agency (JICA).
The success of the Delhi Metro project has prompted other cities to develop their own metro systems. At present, Japanese ODA is funding the Bangalore and Chennai metro rail projects, besides providing expansion funding for expressway development, city ring road projects, and urban development projects, among others.
Other significant areas of Japanese assistance are the Delhi-Mumbai Industrial Corridor (DMIC) Project and the Chennai-Bengaluru Industrial Corridor (CBIC). The DMIC is a Japanese-Indian collaborative project for comprehensive infrastructure development meant to create India’s largest industrial belt zone, linking the industrial parks and ports of six states between Delhi and Mumbai to promote exports and FDI.
The Japanese ODA loan project will focus on constructing approximately 1500 km of track on the western corridor between the two cities, connecting major cities in the six states, as well as introducing electric locomotives capable of high-speed, high capacity transportation. The project is expected to make a far-reaching contribution to India’s economic development.
The economic impact of these projects has been immense. The advantages of greater mobility of labor courtesy of Delhi’s metro are showing in the number of satellite office districts springing up around Delhi. For example, the metro is a more convenient choice than the drive from Delhi to Gurgaon and back.
Assistance for infrastructure development has been to support projects that are expected to create significant economic impact, with Delhi’s metro being the perfect example. Interest rates lower than commercial rates and long repayment periods have helped India develop transport networks that are crucial to a growing economy.
Although almost 95 percent of Japanese ODA is poured into infrastructure development; some of it is also used to deliver a larger scale socioeconomic impact in other areas. For instance, safety measures at construction sites have been significantly enhanced. Work flows have been streamlined, enabling timely completion of projects. Workers assigned to the Delhi metro project, for example, have completed various sub-projects ahead of schedule on more than one occasion.
Moreover, infrastructure construction attracts many migrant workers who lack knowledge about HIV. Responding to this lack of education, projects financed by Japanese ODA conduct HIV prevention activities. These efforts should be duplicated elsewhere, as they correctly target the most vulnerable population.
The crucial role infrastructure development plays in easing supply side constraints on economic growth has been well recognized. According to the 12th Plan, as much as Rs 55,00,000 crore ($1 trillion) is required for investment in infrastructure. Much has to be done to acquire this funding, including capital market reforms that would facilitate borrowing.
It bears noting that the corporate bond market in India is still in its infancy. There is an increasing reliance on the private sector for developing and maintaining infrastructure. However, these projects are heavy-capital intensive and have a high gestation period. This problem is further compounded by the fact that most commercial banks and financial institutions have reached their exposure limits for funding infrastructure.
Japanese ODA has eased the burden of borrowing in the Indian market. Moreover, with the Japanese economy still struggling to induce growth, investments in India offer an avenue to earn interest income.
The deepening ties between India and Japan are thus a step in the right direction for both countries. Many would argue that Japan’s growing interest in India is largely attributable to deteriorating Sino-Japanese ties. This may well be true, as Japan expects India to act as a counter-balance to China in the region and is therefore keen to extend its full support to India not only on the infrastructure front but also in key strategic areas such as defence and civil nuclear technology.
From an Indian perspective, however, whatever Japan’s intentions, the country’s ODA has helped India bridge its own infrastructure deficit. Increased Japanese FDI is also likely to give a huge boost to the Indian economy, which has suffered from weak investor confidence in recent years.
Needless to say, China’s recent territorial actions only reinforce the logic of strong Indo-Japanese ties. Hence, Indo-Japanese strategic cooperation is very than welcome.
Rohit Sinha and Geethanjali Nataraj are with the Observer Research Foundation, New Delhi.