Indian Prime Minister Narendra Modi sets off for Japan this weekend on a wave of hype and hope. He deliberately singled out Tokyo for his first bilateral visit outside the Indian subcontinent and has courted Prime Minister Shinzo Abe assiduously. On Thursday, Modi tweeted a message of peace, prosperity and partnership -- in Japanese. (Abe, who counts Modi as one of only three people he follows on Twitter, responded in English.) Part of Modi's motivation is geopolitical: In Abe, he sees a fellow Asian nationalist, one bent on reviving his once-great country and countering the overwhelming influence of China in the region.
Another part is clearly commercial. The Indian prime minister is bringing along a hand-picked and high-powered delegation of tycoons, including India’s richest man, Reliance Industries’ Mukesh Ambani, and Gujarat industrialist Gautam Adani. After a long period of stagnation, Modi is hoping to persuade Japanese investors and the Japanese government (whose cumulative aid to infrastructure projects in India totals $38 billion) that the country is open for business once again.
No doubt the hugs will be sincere when Modi and Abe meet in person on Sept. 1. And in years to come, the specter of a mighty China may indeed strengthen the relationship between Asia's two "middle powers." But Modi is going to have to make a much stronger case if he wants Japanese money to start flowing India's way.
Consider this: From 2000 to 2013, Japanese investors poured $16 billion into India. They funneled almost the same amount -- about $14 billion -- into China in just two years, 2012 and 2013. Those also happened to be particularly tense years in terms of Sino-Japanese relations, with the two rivals at loggerheads over a set of islands called the Senkakus by Japan, which administers them, and the Daioyu by China. In terms of official aid, the Japanese government favors China as well, sending $19 billion to the mainland from 2008 to 2012, compared with the $12 billion distributed to India.
Excellent atmospherics and good salesmanship won't be enough to change this dynamic. The fact is that after Modi's first 100 days in office, India remains a terrible place to business. The country ranked 134 out of 189 countries in the World Bank’s Ease of Doing Business Report, 2014. (China came in at No. 96, and even terrorism-wracked Pakistan surpassed India at No. 110.) And when it comes to the reforms that would matter most to Japanese investors, the chances of progress are depressingly remote.
In particular, Japanese companies still confront the same hurdles to acquiring land for large infrastructure or manufacturing projects. A law passed under the previous government last year made the process terribly expensive: Buyers have to pay four times the market price for agricultural land, and double for non-agricultural land. Worse, the law introduces a new layer of bureaucracy -- every acquisition must be preceded by a "social impact assessment" meant to win over local residents. These obstacles have held up several large projects, including the $100 billion Delhi-Mumbai Industrial Corridor. The Japanese government holds a 26 percent stake in the project, which involves the construction of a rail freight corridor between India's two largest cities, as well as new industrial zones and "smart cities." The deadline for the completion of the first phase has already been pushed back from 2013 to 2017. Each additional day of delay costs $8 million.
It's not clear that Modi's government has the will or the political clout to amend the populist law. Similarly, the new government has yet to address India's tax system, which is complex, inefficient and corrupt -- and is burdened by rates that remain high compared to other countries in Asia. Modi's first budget, presented in July, only tinkered around the edges of the problem. The next budget isn't due until February.
Like Modi, Abe has had his own troubles battling vested interests at home as he tries to revitalize the Japanese economy. The two leaders should spare some time to talk about those shared challenges, which will determine the fate of the India-Japan relationship no less than China will.
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