The Indian Economy Blog

August 21, 2007

Japan And India: A Relationship To Watch?

Filed under: Business — Shefaly @ 9:32 pm

Daniel Altman, in a blog post on the IHT, says Japan has found a new ‘client’ in India. Referring to a $100B investment project, the Delhi Mumbai Industrial Corridor, he says this relationship is based more on economic convenience than on geographical proximity or historic ties.

By way of background, Japan is cumulatively the 4th largest foreign direct investor in India, with most of the collaborations expectedly in the automotive and engineering sectors. In the future, collaboration is expected to be extended to other sectors including infrastructure and biotechnology.

In Altman’s suggestion, that Japan is investing in return for a share of the spoils, fellow blogger ‘Pragmatic’ sees cause for being angry and some readers perceive an insult.

I am just a bit amused. I am not quite sure which bit of the commentary is insulting. It is not as if Altman has referred to Japan as some Madam, with a little black book of ‘clients’ that India (or rather Indians) should consider this an affront to their izzat. For an investor, expecting a share of the spoils – otherwise called return on investment – is also a justifiable expectation.

Altman does however falter at several steps.

Firstly, on the assumption that investing in infrastructure is going to produce spoils worth sharing, and produce them post haste: as an asset class, infrastructure is still being ‘sold’ by asset managers. For Japan to put up $100B – of a projected $150B (see link above) is a high risk investment at best.

Further Altman highlights that economic convenience, and not geographical proximity or historical ties, is driving Japan and India’s mutual interest (although I think I give him too much credit; his post does not intend highlighting mutuality in the relationship at all which may be why the Indian blogosphere is upset.).

Here I think he makes two mistakes.

One is of omission. Japan and India indeed have no historic ties, but Japan and China do, and perhaps Japan’s investment and partnership with India is a diplomatic counter-measure to the growing power of China in the region. So there is a convoluted historic tie there indeed, albeit of the kind ‘my enemy’s enemy is my friend’. Altman omits to mention this.

The other error is of commission. I am not sure money is invested in return for nothing. His shorthand, economic convenience, although crude, is actually why we all invest. How is this an objectionable driver for a relationship between two countries?

In referring to geography and history, I think he also confuses sovereign investors with Silicon Valley VCs who would typically invest in ventures that are close enough to be monitored and preferably created by teams the VCs have funded before! But let’s leave that aside.

His counter-point, if you follow comments on his blog post, is that the $100B is more important to India than it would have been to China, is a bit of a stretch. That is a simple normative judgement, not a good argument. It is hard to valuate, at this point in time, the DMIC infrastructure once complete, even though Altman believes that it will not do much for India.

Sovereign governments are making three kinds of investments at the moment – direct investments in partnership with the receiving nation’s government, which Japan is doing; direct investments in private businesses so as to take ownership or to alter substantially the ownership structure of those business, such as Istithmar* acquiring Barneys; taking positions in large, more diversified funds such as China’s investment in Blackstone.

Missing this diversity of investment behaviours is another problem (that I can see) in Altman’s argument.

Last but not the least, he says “The important thing is not the relative size of investments in different countries. By that argument, the United States would have much, much more influence in Germany than it does, say, in the Dominican Republic. The key point is how important the investments are to the countries that are receiving them.”

Here I think he is missing the most vital point. If the influence of sovereign states were not believed to be correlated with their investment, the US government would not be jumping up and down to urge the IMF and the World Bank to enforce more transparency and develop codes of conduct for such foreign-controlled funds.

There may be more issues with Altman’s argument. If you think so, use the comments link below to let me know.

* You can argue it is not a sovereign investor, but you could substitute any petro-fund name here and the point will still hold.


  1. [...] Cross-posted on the Indian Economy Blog. [...]

    Pingback by Japan and India: a relationship to watch? « La Vie Quotidienne — August 21, 2007 @ 9:37 pm

  2. Shefaly:

    I think my anger got the better of me yesterday and it has ended up in IEB giving unwanted coverage to Altman and his views. But I do agree with Nitin that it was a malicious piece of headline-grabbing writing from Altman that certainly needs to be rebuffed. You have deconstructed his arguments beautifully and there isn’t much left to be said. A few more facts of interest from today’s Reuters report

    #1 The two countries are also seeking to act as a counterweight to China’s growing economic and diplomatic might in Asia by building closer economic ties.

    #2 The aim (of DMIC) is to boost Indian manufacturing by helping make use of its cheap workforce while solving one of the bugbears of India’s economy — its poor infrastructure and transportation.

    #3 Japan is India’s 10th-largest trade partner, behind Belgium and Switzerland, a state of play that is out of sync with the two economies’ standing in Asia.

    #4 Tokyo is set to offer around 400 billion yen ($3.5 billion) in low-interest loans to help fund the construction of a high-speed freight line between New Delhi and Mumbai as part of that project, the Sankei Shimbun newspaper reported this week.

    It is fallacious to assume the complete $90 billion project as a largesse from Japan, while the actual soft loan is for $3.5 billion only. This demolishes Altman’s normative judgement about relative importance of this amount to India.

    Comment by Pragmatic — August 22, 2007 @ 10:19 am

  3. Shefaly,

    “The other error is of commission. I am not sure money is invested in return for nothing. His shorthand, economic convenience, although crude, is actually why we all invest. How is this an objectionable driver for a relationship between two countries?”

    Nice you know you can take a joke. I suppose the crude observation was about the examples to which the utterly sane Altman attaches the India-Japan FDI – Sudan and Bolivia. If you know anything about what type of “investments” these countries get from China (like blocking action on genocide by UNSC to protect its oil interests) and Venezuela (like Chavez trying to torpedo and corrupting democracy in Bolivia), may be you won’t think it as so crude. The billions of investment is over a decade and it makes a small dent in the current FDI into India.

    May be you are one of those who thinks a westerner can do or say no wrong (I can’t imagine Altman’s defence, otherwise). But India will not be client state to Japan, however many ways you define FDI.

    Comment by Chandra — August 22, 2007 @ 12:01 pm

  4. @Pragmatic: I was surprised to see you let the anger get the better of you so thanks for sharing your thoughts now.

    @Chandra: As I said in the post, comparisons with China-Sudan aside, which appear to be getting everyone’s goat, being a ‘client’ can really not be an insult. It does not matter what he says; it is what we know of the power balance that matters. With such poor comment, Altman has not done any favours to his Harvard PhD in Economics.

    If you read my post, you would have seen that it is not a defence of Altman, as you suggest, but a point-by-point critique of everything he said, including his counter-comments on his own blog.

    If we have to grow and mature as a world power, we need to learn to rise above such arbitrary commentary as well as random reasoning of the kind ‘May be you are one of those who thinks a westerner can do or say no wrong’.

    Why is our self-esteem so fragile that one random comment gets so many otherwise-perfectly-cognitive people so excited and emotional?

    Comment by Shefaly — August 22, 2007 @ 12:43 pm

  5. We are seeing two nation states engaging and making up for lost time. To my mind, whatever be the imagined negative consequences of this (I cannot rationally think of any) , the positives are significant. Altman is using the same facts available to everyone else to make a value judgment. To my mind I feel underlying such value statements is an assumption w.r.t. motives. So long as two sets of people have different assumptions, they will have differing judgments. The only value in these is to see if these recommend or point to any specific policy action. If the point is that India should not engage with Japan in this manner, Altman’s logic is not clear.

    Comment by little Ram — August 22, 2007 @ 8:44 pm

  6. It strikes me that the political and PR investment that Japan is making in India is far more important than the economic one. By partnering with India in large infrastructure projects, Japan builds political good will and relationships with India’s political elite, all of which will come in handy as China continues its growth as an economic and political powerhouse. Japan, it strikes me, is not trying to make a “client” of India – the Japanese leadership is intelligent enough to know that India’s GDP is projected to be well above that of Japan by mid century and that India isn’t going to be anybody’s client – rather, the Japanese are making a pragmatic investment based on a perception of parallel political interests. Both countries want to see China rise constructively in Asia and not devleop a dangerous perponderance of power. Some type of decent working relationship helps this along. The Indian and Japanese governments are making deals to their mutual political and economic benefit. It doesn’t strike me that there is much exploitation going on.

    Comment by Matt — August 22, 2007 @ 9:26 pm

  7. @ little Ram: Good point re assumptions. Also it is hard to see what is negative about this development, except some people are quite upset.

    @ Matt: Thank you! That is the point I was making when I refer to Altman’s error of omission.

    Thanks both, for sharing your views.

    Comment by Shefaly — August 22, 2007 @ 10:09 pm

  8. “Why is our self-esteem so fragile that one random comment gets so many otherwise-perfectly-cognitive people so excited and emotional?”

    Really Shefaly? Thanks for that sanity talk for the otherwise-perfectly-cognitive person. When exactly will your self-esteem be agitated? If you don’t consider the issue important why did you have post on it? Talk about non-fragile self-esteem. I didn’t see any repudiation to Altman in your post. Saying he could have said the same garbage differently is no repudiation. The issue is about relationship between two countries and how one perceives it, not some psycho-babble. It’s not about fragile self-esteems, it’s about setting the facts straight.

    Comment by Chandra — August 22, 2007 @ 11:28 pm

  9. i total agree with ur thoughts. economic status of a country should b understood better. helped me a lot in improvin my knowledge.. y dnt u give a try…

    Comment by payal — August 23, 2007 @ 10:03 am

  10. “Why is our self-esteem so fragile that one random comment gets so many otherwise-perfectly-cognitive people so excited and emotional?”

    I have a problem with this. I like your arguments sans this one. It is not fragile it is just very important and we are touchy about it. If you think about why the author came up with the “provocative” title…. it shows how a person is so uncomfortable with the changing dynamics happening in today’s world. It expresses his frustration on the fact that west and other developed countries are sort of losing grip. To me, this was totally unnecessary. The point he wanted to make could have been done in a better way by stating and analyzing more facts and with more general title. With such title and not much analysis the author failed to actually make his point as now part of the discussion is about banging the author and not the content.

    On a more general front, I dislike the trend of serious authors taking the blogosphere route to test the sentiment before actually coming up with a story.

    Comment by chum — August 24, 2007 @ 5:20 pm

  11. Chum: Thanks for sharing your thoughts.

    Altman is a journalist; it is his job to come up with sensational, attention-grabbing stuff like this. To me, however, seeing a Harvard PhD Economist, a journalist at the IHT resort to emotive, poorly argued commentary of the needling/ fingering sort is amusing. I can however see why many others are not so amused. :-)

    When I was growing up, I had heard a saying “When an elephant walks, the grass gets crushed and dust flies, but the elephant walks, regardless”. An apt metaphor, I think, for the changing situation in the world.

    I foresee more commentaries of this sort, as the power balance in the world changes.

    Thanks again.

    Comment by Shefaly — August 24, 2007 @ 6:13 pm

  12. Shefaly:

    I liked the metaphor and here is more to it …

    Yes the elephant will continue its march regardless but if a silly ant tries to meddle with the nose, it is going to hold the trunk up in the air and let the whole world know that he dislikes it.

    The point I am trying to make here is that it is not a trivial matter to disparage anyone and any country. Now whether we all do it some time or other. Probably yes. but when IHT article says, its bad and it should be told so.

    Sorry for hijacking your comments section (and for digression) of your otherwise-well-written article.

    Comment by chum — August 24, 2007 @ 9:38 pm

  13. Chum: You are welcome (and that is as far as my rhyming/ poetic skills go!).

    Good extension to analogy. Americans probably know all about being disliked by the rest of the world so now they are getting even I guess!

    I am glad you liked the article though. :-)

    Comment by Shefaly — August 24, 2007 @ 10:34 pm

  14. India should treat this proposal by Japan PM as a business plan, don’t look at it as an alliance against china. Remember there is no eternal friend or foe, only eternal interests. Containing china may be in Japan and US interests, india should only pay lip services to them and trade with china to gain leverage with china. Just like a popular girl who is chased by serveral rich guys, india should take full advantage of this chance before fully committed to one side.

    Comment by Eric — August 25, 2007 @ 7:38 am

  15. Eric: Thanks for stopping by and sharing your views.

    “There is no eternal friend or foe, only eternal interests”. Great point. Thankfully it does not always apply between human beings, but it is always the case in international alliances (or should they be called ‘dalliances’?).

    Even better I like your analogy of the popular girl! :-) For the girl, the trick is in knowing when to commit and to whom, and later, whether to move on and when.

    Thanks again.

    Comment by Shefaly — August 25, 2007 @ 7:33 pm

  16. I’m not sure the news reports of India’s obsession with containing China is India-made or American-made. But lately it’s hard not to read an article on India without also seeing the phrase “to contain the rise of China.”

    It makes the Chinese feel quite uncomfortable, and they are undoubtedly preparing countermeasures. At this point in India’s development, it is simply not the most brilliant idea to piss off its largest northern neighbor.

    Comment by yin — September 2, 2007 @ 4:59 am

  17. We should not worry about “pissing off China.” Given their relationship with Pakistan and their grandstanding on Araunchal Pradesh, there is no reason why a Japan, US, Taiwan, Vietnam, Thailand, India alliance should not be declared today. That is not to say that we should do this as it would only create a lot of unnecessary tensions.

    But China will continue to trade with India regardless. And if India-China trade suffers, then it is not a problem. In their trade with India they mostly import minerals and ores and export steel and textiles, even if it shows on paper as a surplus for India. They aren’t stupid, they want TCS and Infosys to continue to invest in their human capital, while we give them our mineral wealth and have it shipped back to us as finished products. Mercantilism at its best.

    Japan is a benign country that is giving India a way to utilize and develop its human capital, not to be manipulated for its natural resources. So what if they want to use our labor force to satisfy our internal market and they profit from it? Isn’t that how economies grow. And yes they have many common interests from patrolling the oil shipping lanes against pirates to containing China.

    And as for our historical ties, lets not forget Siddharta Gautama. And they don’t seem to have any animosity towards Subash Chandra Bose either. Previous relations are not a requirement for good relations in the present. Look at India and Israel, China and Pakistan. Good relationships can be built without requiring ancient ties.

    Comment by Rajeev Kumar — September 2, 2007 @ 6:06 am

  18. Yin: Thanks for stopping by. You say: “But lately it’s hard not to read an article on India without also seeing the phrase “to contain the rise of China.””. Really? I do not know what media you read but I read plenty of material which discusses India on its own, India in the context of its history/ culture/ dynamic growth/ US relationship/ poverty, India and fashion, India and Europe, India and acquisitions abroad. Not a lot of them mention China. Share some links with us, please so we can all understand what you mean. Thanks.

    Rajeev Kumar: Thanks for sharing your views. You say: “Good relationships can be built without requiring ancient ties.” The examples you give are interesting esp because the common theme appears to be ‘my foe’s foe is my friend’. No?

    The relationship with China requires some interesting political ‘adjustments’ from India such as acknowledging Tibet is Chinese, while sheltering the Dalai Lama. I would put my money on the fact that after 1962, there isn’t likely to be another ‘Hindi Cheeni Bhai Bhai’ phase. Thanks.

    Comment by Shefaly — September 3, 2007 @ 4:25 pm

  19. [...] This concerns a post made by International Herald Tribune columnist, Daniel Altman, on his blog, about India and Japan. IEB bloggers Pragmatic and Shefaly have already blogged about it, here and here. [...]

    Pingback by The Indian Economy Blog » The much-discussed IHT post — September 9, 2007 @ 1:13 am

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