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India-Japan closer economic partnership

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In Brief

In a far-reaching strategic move, India and Japan signed the much-awaited comprehensive economic partnership agreement (CEPA) on 16 February. Under this agreement, India agreed to remove tariffs on 94 per cent of goods over the next 10 years. The deal will facilitate trade growth and enable both parties to reach the target of US$25 billion worth of bilateral trade by 2014 from its present US$10.3 billion. This deal has special significance. Barring a similar deal with Singapore and South Korea, this is the first trade deal India has signed with a major industrial country. Further, it will help India to fix its outstanding trade imbalance with Japan. Imports from Japan currently account for almost 60 per cent of India’s total trade.

After over a dozen rounds of negotiations, the agreement was finalised by Prime Minister Manmohan Singh and his Japanese counterpart Kan Naoto in October 2010.


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This process began with the instigation of a Joint Study Group in November 2004, and progressed with 14 rounds of negotiations between January 2007 and September 2010. This was the third CEPA signed by India after Singapore and South Korea. Japan has concluded 12 such agreements, but this is the first such pact with a BRIC country.

India stands to gain significantly from the deal. About 95 per cent of Japan’s 9,000 tariff lines are covered (about 90 per cent of India’s). On a trade value basis, while Japan has consented to reduce 97 per cent of its tariffs on goods trade, India has agreed to reduce 90 per cent.  India’s sensitive sectors are fully protected. These include agriculture, fruits, spices, wheat, basmati rice, edible oils, wines and spirits and also certain categories of industrial products such as auto parts. The CEPA will pave the way for increased Japanese FDI flow into Indian projects. The number of Japanese firms doing business in India has increased exponentially, to 725 in October 2010 from 362 in February 2007. Increased FDI may be the most attractive part of the deal in the coming years.

The basic principles of the CEPA include liberalisation and facilitation of trade in goods and services, protection of intellectual property rights, and corruption prevention measures. Among the sectors in India that will stand to gain market access following CEPA are textiles and pharmaceuticals. The textile sector will get duty-free access to the Japanese market immediately. Japan has also agreed to give the same treatment to the Indian generics (off-patent drugs) in line with its domestic pharmaceutical industry. India accounts for just over 1 per cent of Japan’s textiles and garments imports (from a total value of $31 billion), while pharmaceuticals from India constitute a miniscule 0.06 per cent of Japan’s import market. With Japan’s tariff set to become zero or substantially reduced for Indian exports, India can expect to gain from this.

India also obtained concessions from Japan in the services sector. Japan is a net importer of services, amounting to US$147 billion. It is also facing serious aged-care sector challenges, as demographic change has led to a shortage of professional care givers. The CEPA will create opportunities for Indian nurses and care givers in Japan. Other professionals who would have new access to Japanese service sectors include accountants, researchers, management consultants, computer engineers, engineering services professionals, chefs and English language teachers.

The language barrier remains an impediment for the Indian service sector, as the target of creating a pool of 30,000 Japanese-speaking people in India in 2010 remains unfulfilled.

Japan is now behind China, as the world’s third-largest economy. It is hoped that the CEPA will, by giving Japan increased access to the second-fastest growing economy in the world, help spur Japanese growth. Among those imports from Japan to India that will be duty-free immediately after the pact is implemented are SIM and memory cards, LCD and LED panels, calculators and battery chargers.

India’s exporters are upbeat about prospects, and hope that India’s total exports to Japan will increase from US$3.63 billion in 2009-10 to US$15 billion by 2014-15. After India’s agreement with South Korea took effect India-South Korea trade jumped over 70 per cent in the first year. If this example is repeated in the India-Japan case, a US$25 billion target by 2014 might not be difficult to achieve. Additionally, if current talks on civil nuclear cooperation are fruitful, nuclear commerce may unfold as a new trade front to the tune of US$100 to US$150 billion in the next decade. Japanese companies such as Toshiba, Hitachi and Mitsubishi have high hopes for a shot at the Indian market with their big ticket civilian nuclear power projects.

India and Japan have also agreed to the creation of a joint revolving fund of US$9 billion for kick-starting the ambitious 1,483-kilometre-long Delhi-Mumbai Industrial Corridor Project. When implemented, this single project will dramatically transform the nature of economic ties between the two countries. Apart from its immediate payoff, CEPA should facilitate the smooth execution of both of these flagship development projects.

Rajaram Panda is Senior Fellow at the Institute for Defence Studies and Analyses, New Delhi.

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