As India’s domestic market grows, its imports have increased rapidly.
To secure a position in the Indian market, exports from production bases in members of the Association of Southeast Asian Nations are vitally important in addition to export promotions from Japan and investment in India.
India’s real GDP growth rate has been on a downward trend since peaking at 8.3 percent in the October-December period from the same quarter the previous year.
Nevertheless, the economy was able to maintain a high 7.1 percent year-on-year growth in 2011.
For the five years through 2012, India’s economic growth rate has been a high 8.1 percent on average, and the International Monetary Fund projects that an average annual growth of around 8 percent will be maintained over the next five years.
At $1,457, per capita GDP is low, but India’s markets have changed significantly, in terms of size and substance, in the wake of high economic growth.
According to a white paper of Japan’s Ministry of Economy, Trade and Industry, 13.2 percent of households had annual disposable income of more than $15,000 in 2010, up from 1.2 percent in 2000.
It means that the number of households with annual disposable income of more than $15,000 increased from 13 million to 160 million.
Automobile sales increased from 730,000 units in 2002 to 2.97 million in 2011, while sales of desktop computers rose from 1.7 million to 6.2 million and notebook computers from 40,000 to 3.6 million over the same period.
In addition to durable consumer goods, there is a healthy demand for daily consumer goods, such as soap and detergent, and the consumption market of low-income bracket people is attracting attention as a bottom of the pyramid market.
Japanese companies have high expectations for the Indian market.
India ranks second after China among the most promising investment countries and regions in the medium term, according to the fiscal 2011 edition of the Survey Report on the Overseas Business Operation by Manufacturing Companies, issued by the Japan Bank for International Cooperation.
The main reason given for India’s favorable position was the “future growth potential of local markets,” with a high response rate of 90.5 percent.
The expansion of the Indian market has resulted in a rapid increase in imports. Imports expanded six times from $51.3 million in 2000 to $329.2 million in 2010.
Imports from East Asia increased tenfold from $1.3 billion in 2000 to $13.5 billion in 2010, with the region’s share rising rapidly from 20.5 percent to 31.6 percent.
Within that figure, however, imports from China and Hong Kong rose about 20 times from $2.4 billion to $48.6 billion. Their share grew from 4.9 percent to 15.6 percent.
Imports from Japan increased from $2.2 billion to $8.2 billion, but the country’s share fell from 4.5 percent to 2.6 percent. In this sense, Japan has lagged behind in entering the Indian market.
Against this backdrop, Japan and India signed a comprehensive economic partnership agreement on Feb. 2, 2011, which came into force on Aug. 1 of that year.
Under the agreement, tariffs on products accounting for roughly 94 percent of the trade value between the two countries are due to be removed within a 10-year period through 2022.
However, the agreement is hardly likely to result in an immediate boost to Japanese exports to India because India will not remove many of the tariffs until five years after the agreement came into effect and because Japanese wages are much higher than those of neighboring countries.
Given that situation, there will likely be many Japanese companies that will decide that the only way to secure a foothold in the Indian market is to have a local presence.
Japanese investment in India was 72.9 billion yen in 2009, 157.9 billion yen in 2010 and 92.4 billion yen in 2011, according to the Bank of Japan’s direct investment data.
With advancing globalization of production bases, setting up a direct presence is not the only way to capture Indian markets. The participation in Indian markets through ASEAN economies should also be regarded as important.
India’s imports from ASEAN grew from $4.1 billion in 2000 to $48.5 billion in 2010.
In particular, there are many imports from Thailand, Malaysia and Singapore, including automobile parts and components, air conditioners, household electrical appliances including refrigerators, petrochemical raw materials and so on.
Products manufactured by Japanese companies in these countries are the mainstay of these imports.
Part of the background is that Japanese companies began full-scale investments in ASEAN after the Plaza Accord in 1985 and have set up large production bases.
Japanese direct investment outstanding in Thailand, Malaysia and Singapore totaled 3.5 trillion yen as of the end of 2010, rivaling 3.8 billion yen for China.
As the flooding in Thailand showed, Japan has a big production base in ASEAN countries, which may be termed Japan’s “industrial area.”
An important strategy is to leverage ASEAN production bases to secure a position in the Indian market.
In fact, more Japanese companies are considering using Thailand and Malaysia as export bases for third countries than China, according to the JBIC survey report.
In addition, the ASEAN-India comprehensive economic partnership agreement went into force in January 2010, and Singapore, Thailand and Malaysia have concluded and enacted bilateral trade agreements with India.
The key to participation in the Indian market is to find favorable conditions from among these agreements.
In the long term, it will be essential to have production bases inside India to succeed in the Indian market.
Nevertheless, as the World Bank points out in its report, “Doing Business 2012,” India’s investment environment receives fairly low evaluation, coming in at 132 out of 183 countries.
For Japanese companies, the problems facing full-scale investment in India include “underdeveloped infrastructure,” “unclear administration of the legal system” and “complicated taxation system.”
Given the severity of the investment environment in India, it might well be a good idea to give full consideration to exporting from an ASEAN nation or other intermediate country.
* * *
Keiichiro Oizumi is a senior economist at the economics department of the Japan Research Institute.
This report was published in the May 2012 edition of Asia Monthly, an English-language publication of the institute, and was edited by The Asahi Shimbun. The original report is available at (http://www.jri.co.jp/MediaLibrary/file/english/periodical/asia/2012/05/contents.pdf).
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