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First China and now Japan is posing a threat to India’s trade balance. India’s trade deficit against Japan nearly doubled in the last seven years from $ 3.53 billion in 2011-12 to $ 6.24 million last year.

This must have surprised India’s trade analysts who had expected a different scenario following Indian Prime Minister Narendra Modi’s affection for Indo-Japanese relations. The purpose of Modi’s frequent visits to Japan has been to woo industrialists to invest in India. In fact, Japan had pledged a huge of amount of around $ 33.8 billion in government and private sector investments for five years following the Modi-Abe meet in 2014.

Japan has reportedly invested in the $90-billion Delhi-Mumbai Industrial Corridor, which will see the setting up of new cities, industrial parks, ports and airports, besides a 1,483 km high-speed rail and road line. It is also backing the Ahmedabad-Mumbai bullet train service and has already released the first installment of Rs. 5,500 crore. Japan is the third largest source of FDI into India after Mauritius and Singapore. India received $28.160 billion in FDI from Japan between April 2000 and June 2018. Japan’s share in total FDI inflows to India was 7.24% during this period.

Much as these developments may be highlighted, the main thrust of Modi’s Japan connection must be to find a military as well as strategic ally. India and Japan are reportedly consolidating their defence ties.  After the joint army, navy, and air force exercises, they are looking to allow their respective naval forces to use each other’s facilities, especially against the threat of China in the Indo-Pacific region.

For Japan, however, there is another area of interest, the merchandise trade. A growing Indian economy has given Japan another export market for its goods.

The Comprehensive Economic Partnership Agreement (CEPA) signed by India and Japan in February 2011 and implemented from August 2011 was expected to boost bilateral trade in goods and services. However, India’s merchandise exports started falling against rising imports of Japanese goods.

While import from Japan in the decade, between 2010-11 and 2017-18 increased 62% from $ 8.62 billion to $ 10.97 billion, export to Japan during this period declined by about 7% from $ 5.09 billion to $ 4.73 billion. The trade deficit as a result, increased from (-) $ 3.53 billion to (-) $6.23 billion during this period. Japan’s share in India’s trade deficit in 2017-18 was estimated at about 4% ― up from under 2% in 2013-14. It was 5.5% in 2016-17.

There is a flipside to this growing trade deficit. About a fourth of the imports from Japan are accounted for by nuclear reactors, boilers, machinery and parts there of – something India needs even at the expense of a growing trade deficit.

Indian exports to Japan are not growing despite the fact that exporters do not face any tariff barriers. One reason may be a traditional export basket, which has less appeal to consumers. One hopes that the commerce ministry’s  plans to run special programmes for trade promotion in Japan in identified sectors like textiles, garments, information technology services, pharmaceuticals, leather pro-ducts and agro-processed products will help to increase export in the coming years.