India’s Contrasting Economic ties with Japan and China

Posted in Finance Articles, Total Reads: 1815 , Published on February 11, 2015

The last few months of the year 2014 have seen heightened activity in the multilateral arena with significant initiatives between India and Japan, China, Australia and the US. Amongst these, seemingly significant bilateral talks were held with the two Asian giants namely, Japan and China.

The fact that our honourable Prime Minister visited Japan before the Chinese President Xi Jinping visited our country raised eyebrows and posed significant questions about India’s economic diplomacy with these two countries. Strengthening relations with one country could be seen as an alternative to the other. This was on account of the strained relations that exist between China and Japan. However, a closer view would provide that India has historically had a relationship with China that is quite different from that of its relationship with Japan. While the bilateral relationship with Japan has been quite strong, the multilateral collaboration has been historically weak. On the contrary, the Indo-China multilateral engagement is quite strong while the bilateral ties have seen tremendous volatility.

In this context, we could compare and contrast our bilateral and multilateral ties with these countries:



i) Indo-Japan

Trade and economic flows to and from Japan have been sizeable and significant since the early 1980’s. Huge projects such as the Kolkata metro and Maruti Suzuki were successfully executed during this phase. India’s ‘Look East’ policy also posited Japan as a key partner. Furthermore, Japan continues to be India’s third largest foreign direct investor. The biggest testimony to prove the strength of these bilateral ties is the Delhi Metro Rail project. The India-Japan economic partnership agreement also seeks to provide a boost to Japan’s FDI inflows into India and our country’s exports to Japan. The two sides are now discussing the Delhi Mumbai Industrial Corridor Project and Dedicated Freight Corridor Projects on the Mumbai-Delhi and the Delhi-Howrah routes. In the latest bilateral talk, the Japanese government has announced their intention to invest around 3.5 trillion yen in India over the next five years. These funds shall be invested on the rejuvenation of Ganga, smart cities, transport systems, skill development and next generation infrastructure among other projects. Though the civil nuclear deal that was anticipated failed, but majorly these activities right from the early days indicate the close nature of relationship between the two countries.

ii) Indo-China

Bilateral economic ties with China have been marked by huge asymmetry. India’s trade balance with china is highly skewed with imports into India far surpassing the exports. India has majorly been importing manufactured goods while exporting certain primary commodities, as shown in the following graphic:

There are also certain non-tariff barriers that have been imposed on Indian exports into the Chinese markets. Another major area of contention is the anti-dumping laws that exist as also the underdeveloped transportation links and various geopolitical issues that have prevented the establishment of any strong ties between the two neighbours. The recent bilateral talks have resulted in certain deals been signed to give a boost to the commerce and economic engagement amongst the two Asian giants. These initiatives might help it bridge the massive trade deficit with its neighbour. These measures indicate deepening of the ties between the two countries.




i) Indo-Japan

India’s engagement with Japan on a multilateral platform has not been very active. Japan is not a part of the G-77 where India has been traditionally active. Whether it is in terms of supporting India’s cause at the World Trade Organization or the International Monetary Fund or pushing forward India as a major player at the Asian Development Bank (where Japan happens to be the dominant player) is all but indicative of the fact that the multilateral ties are strong in any manner.


ii) Indo-China

At the same time, India and China have made considerable progress in terms of their multilateral cooperation. The establishment of the BRICS community has further advocated the cause, where frequent collaboration on different aspects takes place, such as the establishment of a New Development Bank as a substitute for the IMF. China and India have also cooperated well on issues such as those relating to climate change and trade negotiations. China has also invited India to be a member of the Asian Infrastructure Investment Bank. It is an international financial institution proposed by China majorly to fund various infrastructure projects in the Asia Pacific region.


There are other issues as well that deserve attention:


1) The strategic relationship between India and Japan will continue to be conditioned by Japan’s relationship with the US. In the event of any confrontation between India and the US, this could act as a rider on Japan’s support for India.

2) China’s public sector most certainly has higher resources at its disposal to be invested in India than those available with the private players in Japan. Moreover, they are also more cautious in investing huge sums due to the structural reform process undergoing in India.

3) China has made strategic tie ups and is trying to capture India’s neighbours with the concept of Maritime Silk Road. This has negative implications for India, but could benefit India only if the Chinese involvement in South Asia is managed appropriately.


In the context of the above discussion, one could therefore look at the complementarities of India’s relations with China and Japan.

It is not simply a question of choice of one nation over the other. It is indeed important for India to maintain friendly relations with both the countries. What then flows out as a conclusion is quite clear. The country must seek to strengthen multilateral ties with Japan while consolidating the success of bilateral engagements. The strategy for engagement with China is quite the opposite. While there are enough platforms existing for bilateral collaboration, the country should seek closer and stronger bilateral ties with China.

This article has been authored by Vishnu Batra from NMIMS Mumbai









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