Why India’s slowdown had deterred investments from Japan

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Japan & India: The second- and third-largest Asian economies

Japan and India are Asia’s second- and third-largest economies, with gross domestic products, or GDP, equivalent to $4.9 trillion and $1.9 trillion, respectively, according to World Bank statistics for 2013. In fact, Japan is the third-largest economy in the world by GDP, behind the U.S. and China, while India takes the tenth position.

For economies of such size, the volume of trade between them seems small. In 2013, trade between Japan and India amounted to$15.8 billion. This is about a fourth of the volume of trade India has with China. Though India accounts for only 1.2% of Japan’s total outward foreign direct investment, Japanese direct investment in India has amounted to $21 billion between 2007 and 2013. This makes Japan an extremely important investor for India.

Direct and indirect investment opportunities

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India has always offered a myriad of investment opportunities to potential investors. Investors have had options for direct capital infusion in the country in the form of FDI and FII. They’ve also invested and made gains from the industrial and business growth in the country through exchange-traded funds (or ETFs) like the WisdomTree India Earnings Fund (EPI) and the Invesco PowerSharesIndia ETF (PIN).

These ETFs invest across varied sectors and in blue-chip Indian companies like Infosys (INFY), HDFC Bank (HDB), and Tata Motors (TTM).

The economic slowdown has tapered investments

Recently, however, investment inflows into India from Japan have tapered off amid India’s economic slowdown. Over the past three years, Japanese firms have invested more in Vietnam and Indonesia than in India. It’s now a challenge for India to grab a greater share of Japanese foreign investments.

Indian Prime Minister Narendra Modi’s five-day visit to Japan to discuss investment opportunities in India with his Japanese counterpart, Shinzo Abe, is therefore an important stride in that direction.

However, during the recent visit, important decisions were made on the economic side. These especially include Japan’s promise of investing $33.58 billion over the next five years in India.

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