The Narendra Modi-led government is trying to build stronger economic ties with some of the world’s largest economies. While it has held active dialogue with countries such as the United States, China, Australia, Germany and France, the most promising partnership being developed is with Japan.
When Japan’s Prime Minister Shinzo Abe met Modi last year, it was not just an indication of their strong personal relationship but also a reflection of the potential seen for increased economic cooperation between Asia’s second and third largest economies.
While Japanese corporates have been investing in India for years, their role as project financiers is set to grow in the future. India’s gigantic infrastructure requirements can only be fulfilled if the country draws overseas funding, and there is no doubt that a major portion of this could come from Japan.
The two countries have complementary investment needs. With depressed yields at home, Japanese institutional investors are increasingly looking abroad for higher returns to fund, amongst others, retirement obligations. Meanwhile, India needs to tap into overseas pools of liquidity for the investment capital needed to realise its vast potential.
The success of Modi’s ambitious “Make in India” campaign will rely heavily on building infrastructure by creating an enabling policy framework and a conducive environment to expand the domestic manufacturing sector, which will eventually enable millions of young Indians to find employment.
Over the next five years, India needs to invest around $1 trillion in infrastructure development, which has largely been funded domestically till now.
Japan’s Government Pension Investment Fund (GPIF), which has assets of over $1.1 trillion, amended its portfolio norms last year. This could potentially unleash upwards of $100 billion into the international bond markets. The question is: How do bonds from India garner a greater share of these funds?
As of now, foreign portfolio investors can own up to $81 billion worth of Indian rupee debt, but the limit is expected to be increased. Also, foreign ownership of Indian debt – at approximately 5 percent – is amongst the lowest in Asia.
Amongst the investment-grade, emerging-markets local currency bonds, India offers pretty much the highest yields and there are strong possibilities of a credit rating upgrade for India in the future. Making more of its debt available to overseas investors while obtaining a higher rating is one way for India to attract Japanese funding.
Another avenue for participation from Japan is investment in offshore bonds by Indian issuers. The volume of offshore bonds issued by Indian banks or corporates is rising and improvement in the Indian macro-economic situation should present investors with a compelling story among emerging market economies.
The green shoots of Japanese support for Indian infrastructure are already visible. Japan has announced a funding $35 billion across a wide spectrum of projects in India over the next five years, including the prominent Delhi-Mumbai Industrial Corridor project and the Dedicated Freight Corridor projects.
The Japanese wallets are full of cash and they essentially need the right opportunities to commence a shopping spree. The ball is in India’s court.