Economy & Tech

Japanese Companies in India Expect Profits After Years of Struggle

JETRO shared that 70% of Japanese companies in India expected profits in 2023. However, regulatory issues and income inequality remain barriers to business.

Published

4 weeks ago

May 30, 2024

Tomoo Iwata

A seminar hosted by the Indian Embassy in Tokyo in April. (©Sankei)

During my time as a correspondent in New Delhi, India a few years ago, I frequently encountered a lament among Japanese businessmen: "How much longer must we endure losses doing business here?"

In 2007, then-Prime Minister Shinzo Abe addressed the Indian Parliament with a speech titled "Confluence of the Two Seas." Abe's words, "A strong India is in the best interest of Japan, and a strong Japan is in the best interest of India" resonated with the Indian people.

India began to attract attention as an alternative to China for business expansion. However, profitability remained elusive, with even prominent firms like NTT Docomo and Daiichi Sankyo encountering setbacks.

But recently, things have started to change. Japanese companies, once struggling in India, now often tell me that "business is good."

Over 70% Report Profits

At a seminar hosted by the Indian Embassy in Tokyo in April, a representative from the Japan External Trade Organization (JETRO) shared encouraging figures.

According to JETRO's annual survey of Japanese companies worldwide, over 70% of those operating in India expected to be "in the black" in 2023. This surpasses the figures for countries such as Malaysia, Thailand, and China. Compared to 2014-2016 surveys, where just over 50% of companies reported profits, this marks a notable improvement.

This upward trend shows no signs of slowing down. According to JETRO, more than three out of four Japanese companies plan to expand their operations in India in the next one to two years. India was their top choice out of major countries and regions for business expansion.

In contrast, less than 30% of companies intend to expand in China, which is facing a severe real estate slump. A mere 4% contemplate expansion in Russia, which is grappling with sanctions imposed by the G7 following its invasion of Ukraine.

At the seminar, JETRO's Executive Vice President Kazuya Nakajo stated, "India is no longer a country that produces meager profits. Many businesses are now reaping substantial gains."

R Dinesh, President of the Confederation of Indian Industry (CII), led a delegation to Japan. Explaining the reasons behind India's success, he proudly stated, "This shows how much India's economy has improved." He further emphasized that the GDP growth rate "would easily exceed 7.5% in the coming years," highlighting India's appeal as an investment market and destination.

Barriers to Business

However, according to a 2022 report by the Japanese foreign ministry, there were around 4,900 Japanese business establishments in India as of October 2022. This trails far behind China's 31,000 establishments.

Persisting grievances among Japanese companies regarding business in India include issues surrounding its regulations and legal systems concerning land acquisition, taxation, and investment.

Sibi George, the Indian Ambassador to Japan, stressed India's ongoing transformation. He stated, "Businesses operating in India have much more potential than what has been realized." With China likely in mind, he set an ambitious goal of increasing "the number of Japanese companies from 1,500 to 15,000."

India benefits from a demographic dividend, with a growing working-age population propelling its growth. CII President R Dinesh highlighted that "skilled and talented workers are valuable in labor-scarce Japan." At the same time, he acknowledged Japan's cautious stance on immigration, stating, "This doesn't entail immigration. Workers would return to India after a few years."

500 Million Living in Poverty

There are other factors contributing to the lingering reservations Japanese companies hold toward India. One of them is poverty.

According to the World Inequality Lab, led by economists in Paris, India had the highest income distribution disparity in 2022. The top 1% received 22.6% of national income. Furthermore, the top 10% captured 57.7%, the highest percentage after South Africa. These figures highlight significant income inequality and underscore the reliance of the impoverished on government support.

In January 2024, the National Institution for Transforming India announced that India's poverty rate was 11%. This marked a substantial improvement from 55% seventeen years ago.

However, according to Professor Mohan Kumar of O.P. Jindal Global University and former Indian Ambassador to France, "Out of India's approximately 1.5 billion population, 500 million are impoverished." He revealed this in April during a book launch event at the Indian Embassy in Japan.

India occasionally resists pressure from the West and other countries when forming international agreements on issues such as climate change and intellectual property rights. Kumar argued that this was because "the interests of these 500 million people come first."

However, what India regards as "common sense" may sometimes be perceived as a barrier by foreign investors.

While India's anticipated economic growth sparks hope among companies, the challenge lies in narrowing the wealth gap and presenting a more appealing image for investors.

(Read the article in Japanese.)

Author: Tomoo Iwata, The Sankei Shimbun