March 2010
Asian Research Report 2009

How India’s Dynamism Can Energize Japan— Cooperating on Infrastructure and Environment to Clear theWay for Growth —Shujiro UrataSenior Economist, Japan Center for Economic Research
Professor, Waseda University• India ranks with China as an engine of global growth• To achieve high economic growth, it must address such issues as education and the laws
governing trade and business• The small number of Indian exchange students in Japan is a problem we must address

India stands alongside China as a nation whose huge population and ongoing
rapid economic growth have put it in the global spotlight. Both the Indian and Chinese
economies slowed briefly under the impact of the global recession precipitated by the US
financial crisis that broke in September 2008, but in 2009 both economies rebounded. The
speed of their recoveries compared with those of the advanced industrial economies of theWest and Japan has fostered high expectations of India and China as engines of global
economic growth.
A research team at the Japan Center for Economic Research (of which I was teamleader) analyzed the factors behind India’s rapid economic growth, identified challenges tofurther growth, and examined possible responses to those challenges. We compiled areport detailing our conclusions and recommendations, including ways to inject some ofIndia’s dynamism into the Japanese economy.

*****In 2008, India’s gross domestic product was $1.218 trillion, about one-third that ofChina and only one-fourth that of Japan. By purchasing power parity, however, India’s
economy is already the fourth-largest in the world, following

those of the United States,

China, and Japan. In both population (about 1.1 billion) and land area (some 3.28 million
square kilometers), India is roughly nine times as large as Japan. A high percentage of its
population consists of people in younger age groups, and a large portion of its land isfarmland.
After achieving independence in 1947, India chose the path of a command

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economy on the socialist model. Instituting protectionist policies to nurture domestic
industry, it promoted industrialization by substituting imports with domesticallymanufactured products. But low productivity, together with such non-economic factors as
natural disasters and the conflict with Pakistan, hobbled the economy, and growth failed tomeet expectations. During the 1980s, gradual economic liberalization helped boost growth
rates, but at the same time the nation’s fiscal and current-account deficits ballooned. In 1991,
India found itself in the midst of a serious economic crisis.
Under the economic leadership of (current prime minister) Manmohan Singh, thenserving as minister of finance, the Indian government adopted a program of economicreform. By liberalizing external economic policies, such as those governing trade andinvestment, while reforming the domestic financial system and abolishing industrial
licensing in principle, the new policies opened the door to competition and revitalized
private business. The payoff from the reforms was most dramatic after 2000. Real economic
growth from 1991 to 2003 averaged slightly less than 6% a year, but from 2003 to 2007, it
was more than 8%.
Driving India’s economic growth since the 1990s has been the service sector,
particularly services in the new and fast-growing area of information technology(IT). The
IT revolution and the trend toward globalization combined to give a major boost to India’s
IT industry, which also benefits from the nation’s abundant supply of talented engineers.
After 2000, rapid economic growth and the resulting jump in incomes and buying
power began to manifest themselves in the rapid expansion of India’s middle class.
Businesses began targeting this growing spending power with appealing consumer
products, such as passenger cars and motorbikes, electric appliances, and cell phones, anddomestic consumption took off. For example, Tata Motors, India’s top automaker, hasdeveloped the world’s cheapest car, selling for as little as 100,000 rupees (roughly US$2,200), in a bid to expand sales. Competition between cell phone companies has driven
rates down so far that monthly growth in subscribers over the past two years has been inexcess of 10 million (see figure). Another area of rapid growth is fast moving consumer
goods, including such commonly used consumables as shampoo and beverages. Growing
consumption has in turn spurred business investment, creating a “virtuous circle” of
economic growth.

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New Phone Subscribers in India（ million）
500

400

Land lines

Cell phones

Total

3/20063/2007

300

200

1000
3/20043/20053/20083/20096/2009Source: Telecom Regulatory Authority of India*****
India is blessed with a number of factors conducive to continued rapid growth,
including an increasing working-age population, booming domestic demand, robust
investment, and expanding foreign trade and direct investment. However, it must also
overcome numerous challenges.
The first of these is inadequate infrastructure. India suffers from serious
underinvestment in two crucial areas, transport—including roads, railways, andports—and electric power. This deficiency not only hinders economic activity but also
discourages the influx of foreign capital, an important contributor to growth.
The Indian government is keenly aware of the importance of infrastructure, but
projects continue to be delayed by the need to iron out differences between the state
governments and New Delhi, which has final say over financing and regulation.
Education is also a serious issue. High-quality human resources are vital toeconomic growth, and education and training are required to develop such humanresources. But India’s education system is inadequate at every level, be it elementary school,secondary school, or higher education. Close to one-third of all Indian children fail tocomplete elementary school because they are pulled out of classes to work in the fields orassist with the family business. Only 10% of India’s youth enroll in an institution of highereducation. And higher education is essential to the knowledge-intensive industries most
likely to power the economy in the future, including IT, health services, and biotechnology.
The swelling ranks of young people augur well for economic growth if they can find work;
but if decent jobs are scarce and unemployment swells, it will turn into a minus. A key toincreasing job opportunities for the young is to boost their skills through education andtraining.

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Agriculture is another sector with a major impact on the Indian economy.
Although the contribution of agriculture to GDP has been dwindling yearly, falling toabout 17% in fiscal 2008, two out of three Indians still make a living from farming. Poor
harvests cut into incomes throughout rural communities, depressing consumption anddragging down the entire economy. India’s rural population, much of it impoverished,looms large in Indian society and politics. In addition to inadequate infrastructure, such asirrigation and roads, agricultural production is hampered by a dearth of investment capitaland backward technology. The government has encouraged financial institutions to step up
lending to farmers, but there is also a pressing need for non-financial support, including
steps to accelerate the spread of new technology and expand marketing networks.
While economic reform has made considerable progress in India, many archaic
policies and systems remain in place. Labor laws continue to provide excessive protection
for workers at the expense of industry, legal compliance remains lax, and federal policies
still restrict foreign capital and protect domestic industry from imports. As a result of therising political awareness among India’s farmers and Dalits (“untouchables”), politicians
are apt to resist any reforms that could adversely affect farmers or workers.
Other issues waiting to be addressed are the fiscal deficit, health care, energy, andthe environment. India’s own efforts will be the key factor in solving these problems, but itshould also make the most of any support that other countries, such as Japan, have to offer.

*****
Japan stands to gain economically from closer ties with a country expected to enjoy
rapid economic growth in the years ahead. Although trade and direct investment between
India and Japan have increased sharply in the past few years, volume is still low for thesize of our economies. To further expand economic ties between Japan and India, it isimportant to lower barriers to trade and investment by quickly concluding the current
negotiations for a Japan-India free trade agreement and by transforming theComprehensive Economic Partnership in East Asia from a concept into a reality.
The biggest new initiative for Japan-India economic cooperation is theDelhi-Mumbai Industrial Corridor, an ambitious plan to develop the 1,483-kilometer
stretch of land between Delhi and Mumbai into an industrial zone comparable to theTaiheiyo Belt between Tokyo and Osaka. If the plan comes to fruition, it will help boost
India’s economic growth and provide new business opportunities for Japanese companies.
However, a number of challenges must be met to ensure the plan’s success. These include
sufficient investment by Japan, the Indian government’s guarantee of a loan from the Japan
Bank for International Cooperation (the international arm of the Japan FinanceCorporation) to finance preliminary studies, and resolution of local issues regarding theindustrial parks and development of infrastructure in the six states involved.

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Environmental issues present a tough challenge that must be met in order toachieve sustainable economic development. Because of the huge scale of the Indian
economy and its expected growth in the years ahead, India has an important role to play inprotecting the global environment. Japanese companies are highly competitive in theenvironmental field and should be able to take an active part going forward.
People-to-people exchange is another important element in strengthening
economic ties, but such exchange between Japan and India remains woefully inadequate.
Here the focus should be on bringing more Indian IT experts to Japan, which faces apersonnel shortage in the field, and expanding student exchange. In fiscal 2009, only 543
Indian students were studying in Japan, according to the Japan Student Services
Organization. Not only is this figure dwarfed by the number of students from China(79,082), it even falls short of the numbers from Nepal (1,628) and Sri Lanka (934), countries
with much smaller populations. The biggest reason few Indians come to study in Japan isthe language barrier, but another is the difficulty of finding employment in Japan. To boost
the number of Indian exchange students in Japan, Japanese universities need to develop
more cooperative relationships with their Indian counterparts, and Japanese companies
must make greater efforts to hire Indians exchange students at the end of their course ofstudies.

Shujiro Urata: Born in 1950. Graduated from Keio University and received his advanced
degrees in economics from Stanford University. Specializes in international economics.

(The original Japanese article appeared in the January 15, 2010 issue of The Nihon Keizai Shimbun)
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