AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies
NPIRIPS

Nakasone Yasuhiro

The Japan Institute of

Research Institute for

Peace InstituteInternational Affairs

Peace and Security

Editorial Advisory Board:

No. 263

Akio Watanabe (Chair)
Masashi Nishihara
Kenichiro Sasae
Taizo Yakushiji

17 December 2018

Editorial Committee:

ADVANCING INTO A NEW ERA FOR
INDIA-JAPAN RELATIONSTaizo Yakushiji
Tsutomu Kikuchi
Tsuyoshi Sunohara
Shujiro Urata andYasunori Nakayama
Editor & Online Publisher:

Shuji Uchikawa

Kenichiro Sasae
President, JIIA・ The Indian economy has three facets: an
impoverished developing country, an emerging
market with huge purchasing power, and atreasure trove of skilled persons.
・ Flows of foreign direct investment should beinstitutionallyguaranteed.
The
present
institutional framework is not effectively working
to settle disputes involving joint ventures. Boththe Indian and Japanese governments areexpected to discuss ways of improving theinstitutional framework.
・ Japanese companies should more actively
provide training opportunities to semi-skilledworkers and skilled employees.
The views expressed in this piece are the author’s own and should
not be attributed to The Association of Japanese Institutes ofStrategic Studies.

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

Prime Minister of India Narendra Modi visited Japan on October 28-29,
Mr. Abe and Mr. Modi agreed to commit to synergizing India’s demographic
dividend and Japan’s capital and technology to realize the true potential of thetwo countries. How can they combine India’s labor resources with Japanese
capital and technology?
The present Indian economy has three facets. The first is that of adeveloping country where many people live under the poverty line. This is still aserious issue. The number of persons engaged in agriculture has declined since
the mid-2000s partly due to the effects of mechanization. As the labor force
increases, surplus labor must be absorbed into non-farm sectors. Job creation is
the most important issue that the government of India must tackle. On the otherhand, Japanese companies in India have complained of labor shortages. Thereis a mismatch between supply and demand, which is common amongdeveloping countries. Although the percentage of students going on to higher
education is increasing, many youths still cannot complete primary andsecondary school. Japanese companies are looking for vocational school
graduates at reasonable wages. While the number of vocational school
graduates has increased, their standard is not high enough to join Japanesecompanies’ workshops immediately. On-the-job training on shop floors isnecessary.
The second facet is that of an emerging economy. The domestic market
for durable consumer goods has expanded constantly. Even low-income
households have improved their purchasing power. Foreign companies haveinvestment opportunities to capture markets comprising not only middle-classbut also low-income consumers. As foreign direct investments (FDI) have thespillover effect giving domestic companies access to new technology andknowledge, they may contribute to improving the productivity of domestic
companies. In fact, Japanese companies have actively provided advice todomestic suppliers to manage their own supply chains. India expects transfers oftechnology through FDI in addition to job creation.
India has an abundance of skilled persons in ICT as well as othersectors. That is its third facet. Every year many young skilled persons migrate to
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AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

the US, but many ICT engineers also come to Japan, with some of them settling
down in Japan with their families. Japanese companies in India employ
managers and engineers but they face job-hopping by Indian employees.
If we take these three aspects into consideration, the direction of therelationship between the two countries becomes clear. First, flows of FDI should
be institutionally guaranteed. The Economic Partnership Agreement between
Japan and India became effective in 2011. The agreement includes articles onphased tariff reductions, investment rules and the movement of natural persons.
Those on investment rules and the movement of natural persons conform tointernational rules. Japan’s FDI in India jumped after 2008. FDI from Japan has
been encouraged, and Japanese firms have been given a monopoly on a portionof the Neemrana industrial area. At the same time, M&A has been active
between the two countries. In some Japan-India joint ventures, Japanesemanagement has come into conflict with Indian management, and these jointventures have become mired in disputes when the Japanese management
withdrew from India. When the Japanese communications company NTT
Docomo tried to terminate a joint venture with Tata, the London Court ofInternational Arbitration rendered an arbitration award. However, the Reserve
Bank of India opposed its enforcement, arguing that it amounted to a transfer ofshares and was hence illegal. The present institutional framework is noteffectively working to settle disputes. The rules on the termination of jointventures are not clear. These disputes might discourage future FDI between thetwo countries. Both governments are expected to discuss improvements to theinstitutional framework.
Second, Japanese companies should more proactively provide training
opportunities to semi-skilled workers and skilled employees. In 2017, theJapan-India Institute for Manufacturing started a program in which Japanesecompanies directly teach the discipline and attitude required at a manufacturingsite as well as practical skills to young people in India to train future shop floor
leaders. This is a move in the right direction. However, there is a communication
gap between white-collar and blue-collar workers in many factories in India. InIndia, blue-collar workers cannot be promoted to white-collar positions. Good
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AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

communication between engineers and workers on the shop floor is necessary
for Japanese management, and how to establish this is an issue confronting
Japanese companies. Japanese companies in India are trying to employ
highly-skilled managers and engineers, but these personnel prefer American orEuropean companies to Japanese companies because they cannot expect torise to posts in the headquarters of Japanese companies. Indian employees inJapanese companies face a promotion ceiling. If the headquarters of Japanesecompanies were to accept excellent Indian prospects as executive trainees andsend them back to India as executives, they might attract better employees andprevent job-hopping.

Shuji Uchikawa is a professor at Senshu University.

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