India-Japan Alliance India-Japan Economic Partnership: Bilateral Trade, Infrastructure Projects, and Semiconductor Collaboration
July 27, 2023
Posted by India Briefing
Written by Naina Bhardwaj
Reading Time: 8 minutes
India and Japan enjoy a strong economic partnership, marked by extensive trade, investment, and industrial collaboration. The 2011 CEPA trade agreement has played a pivotal role in boosting their bilateral trade, which reached US$21.96 billion in FY 2022-23. Japan remains a significant investor in India, with substantial investments in key sectors, such as automobiles and electrical appliances. Both countries are also collaborating in critical areas like semiconductor technology and steel sector decarbonization. Additionally, Japan has made significant contributions to India’s infrastructure projects under its overseas development assistance program.
India and Japan have forged a robust and enduring economic partnership, characterized by extensive trade, investment, and industrial cooperation. At the heart of this collaboration is the Comprehensive Economic Partnership Agreement (CEPA), implemented from August 1, 2011. The agreement covers trade in goods and services, the movement of natural persons, investments, intellectual property rights (IPR), customs procedures, and other trade-related issues. By reducing tariffs on a wide range of goods and facilitating business activities, both countries have seen their bilateral trade reach new heights, totaling US$21.95 billion in the financial year (FY) 2022-23.
As of FY 2023, Japan was India’s fifth largest foreign investor, with significant investments across the automobiles, infrastructure, and telecom sectors.
Critical sectors, such as semiconductor technology, financial markets, and digital transformation, are now new frontier areas for joint endeavors, underscoring the value India places on its partnership with Japan. Both countries are also keen to drive innovation in the Indo-Pacific region and strengthen their strategic presence.
India-Japan relations were elevated from a ‘Global Partnership’ in 2000 to a ‘Strategic and Global Partnership’ in 2006, and ultimately to a ‘Special Strategic and Global Partnership’ in 2014. In 2022, both India and Japan celebrated the 70th anniversary of the establishment of diplomatic relations between their nations.
During an official visit to India in March 2022, Japanese Prime Minister Fumio Kishida announced an ambitious investment target of US$37 billion (JP¥ 5 trillion) in India over the next five years, demonstrating Japan’s strong commitment to deepening economic collaboration with India.
India-Japan investor cooperation in semiconductor industry
In a significant move, India and Japan signed a memorandum of cooperation (MoC) on July 20, 2023, to collaborate in the fields of semiconductor design, manufacturing, research, talent development, and strengthening the chip supply chain. The agreement aims to foster government-to-government as well as industry-to-industry collaboration, with the establishment of an implementation organization to facilitate these efforts.
A key player in this collaboration is the Rapidus Corporation of Japan, a semiconductor manufacturer formed in August 2022 with the backing of prominent Japanese companies, such as Denso, Kioxia, MUFG Bank, NEC, NTT, SoftBank, Sony, and Toyota. India is currently in advanced discussions with Rapidus to expand their presence in the country, creating a direct channel of communication at the government level between India and Japan.
This cooperation is expected to resolve any confusion that Japanese companies may have regarding the Indian Semiconductor Mission (ISM), offering clarity to investors about where and how to invest in India’s semiconductor sector. Both countries possess complementary strengths, with Rapidus focusing on advanced nodes of semiconductor fabrication in Japan while there is a robust demand for legacy nodes in India. By tapping into the legacy node space, India can cater to both the Indian and Japanese markets.
This agreement is the second major country-level collaboration for India in the semiconductor industry. Just prior, India and the US signed multiple agreements to collaborate on semiconductor design, manufacturing, packaging, and supply chain resilience. While US companies excel in manufacturing and packaging, Japanese companies are leaders in peripheral industries that produce the necessary chemicals and gases for semiconductor chip manufacturing.
Cooperation in the steel sector and decarbonization goals
In recent bilateral talks, India and Japan have focused on enhancing cooperation in the steel sector and addressing decarbonization challenges while striving for a balance between economic growth and a low-carbon transition within the industry.
India is keen to leverage Japan’s expertise in safety training for its steel plants, while Japan hopes to benefit on knowledge sharing on steel decarbonization. Both nations recognize the importance of collaboration in achieving their respective net zero (carbon emissions) goals, understanding that the pathways to decarbonizing the steel industry may vary.
Additional discussions have now been scheduled under a ‘Steel Dialogue’ and other cooperation programs for November 2023. These will prioritize the adoption of innovative technologies to enhance energy efficiency and promote decarbonization in steel production.
India’s rapidly growing steel sector is projected to reach a capacity of 300 million tons by 2030, up from the current 160 million tons. Both nations are aligned on the ‘Make in India’ program and joint efforts in areas like green steel production and improved energy efficiency.
India-Japan bilateral trade and investment profile
Bilateral trade trends
During FY 2022-23, bilateral trade between Japan and India amounted to US$21.96 billion. Notably, Japan’s exports to India accounted for US$16.49 billion, while imports from India stood at US$5.46 billion. It is worth mentioning that Japan’s exports constituted 2.31 percent of India’s total imports, and India’s exports to Japan represented 1.21 percent of India’s overall exports. These figures indicate that there remains significant untapped potential in bilateral trade relations.
Trade composition
India’s imports from Japan have experienced a remarkable growth rate of nearly 160 percent over a 15-year period, reaching US$16.4 billion in FY 2022-23, up from US$6.3 billion in FY 2007-08. Key imported items from Japan encompass a diverse range of products, such as nuclear reactors; electrical machinery and equipment; copper articles; plastic articles; inorganic chemicals; rare earth metals; and compounds of precious metals.
India’s exports to Japan similarly demonstrated substantial growth over a 15-year period of 58 percent, surging from US$3.85 billion in FY 2007-08 to US$6.1 billion in FY 2021-22. India’s export basket to Japan comprises a range of products, with the key items being organic chemicals; nuclear reactors, boilers, and machinery; mineral fuels and mineral oils; fish and other aquatic invertebrates; natural or cultured pearls; and precious or semiprecious stones.