The number of Japanese firms investing in India has been steadily rising in recent years, and the prospects of Japanese FDI have certainly reached an inflexion point since Shinzo Abe became Japan’s prime minister for the second time in December 2012.

The heightened Japanese interest in India has been noted by perceptive investment bankers such as Sonjoy Chatterjee, chairman of Goldman Sachs India. In an interview with Indian business newspaper Economic Times, he argued that "one should look at the level of interest in India from Japan and think of the dialogue that is taking place at all levels of the government and within states, institutions and corporates. Of course, there has been a geopolitical shift, but the level of Japanese interest in India is at its peak now.” 

Making moves

Scarcely a day passes without reference in the Indian business press to some Japanese company that is expressing interest in investing in the country's consumer goods, pharmaceuticals, technology or financial services industries. Japan-based instant noodles company Nissin Foods is reported to be in advanced talks to acquire Indian food company Capital Foods. Elsewhere, Japan’s oldest liquor firm Suntory Holdings has been in talks to pick up a 26% stake in India’s fourth largest liquor manufacturer, Radico Khaitan.

Since India has changed its rules pertaining to FDI – with a 51% stake for foreign investors now permitted in multi-brand retailing and 100% in single-brand retailing – Japanese retail companies, including retail giant Aeon, are starting to show interest in the country.

FDI inflows from Japan have certainly been gathering momentum of late, doubling in the course of a year from $1.6bn in 2010 to 2011 to $3bn in 2011 to 2012. From April 2000 to July 2013, $14.8bn (or 7%) of India’s total foreign equity inflows came from Japan, compared to 9% from the UK and 6% from the US, according to the latest data of India’s Ministry of Commerce and Industry.

Sticking points

Currently, there are 1804 Japanese businesses located across India. More than 40% of these are in the southern states of Andhra Pradesh, Karnataka, Tamil Nadu and Kerala, according to the website of the Japanese Embassy in India.

Although Japanese businesses are becoming increasingly confident about entering and expanding their businesses in India, they do, however, face problems familiar to other foreign investors in the country. The recent joint Indo-Japanese business government dialogue, led by Toshimitsu Motegi, Japan’s minister of economy, trade and industry, noted issues of “complexity” in India’s tax laws and delays in major infrastructural projects largely due to land acquisition problems. Moreover, Japan-based Suzuki, the largest car manufacturer in India through its Maruti Suzuki subsidiary, has experienced labour troubles.

Japan is also keen that India implements its goods and services tax as soon as possible to unify its domestic market. These and other problems will need to be resolved if Japan is to be India’s largest source of FDI over the medium term, as expected by Mr Chatterjee.