Subject: International Relations

India and Japan, two of Asia's largest economies, share a Special Strategic and Global Partnership, yet their economic engagement remains below potential despite recent growth in bilateral trade reaching $22.85 billion in FY 2023-24. The relationship, while promising, faces several policy constraints that need addressing.

Key Policy Constraints

1. Regulatory and Administrative Hurdles

• Complex land acquisition processes under the LARR Act 2013 require extensive social impact assessments and higher compensation, deterring Japanese investments.
• Multiple clearances and permits at central and state levels create bureaucratic delays for Japanese firms.
• State-specific variations in regulations create operational complexities for Japanese businesses.

2. Labor Market Rigidities

• Despite the introduction of four new labor codes, implementation challenges persist.
• Complex labor laws and state-level variations create uncertainty for Japanese investors.
• Skill gaps in the Indian workforce affect Japanese companies' operational efficiency.

3. Infrastructure and Logistics

• Inadequate physical infrastructure increases operational costs for Japanese businesses.
• High logistics costs affect the competitiveness of Indo-Japanese trade.
• Limited connectivity between industrial clusters impacts supply chain efficiency.

4. Trade Imbalances and Market Access

• Significant trade deficit with Japan (Indian exports at $5.15 billion vs. Japanese imports at $17.69 billion).
• Non-tariff barriers in Japanese markets restrict Indian exports.
• Limited market access for Indian services sector in Japan.

Way Forward

1. Policy Reforms and Implementation

• Streamline land acquisition procedures while maintaining fair compensation.
• Expedite implementation of labor reforms uniformly across states.
• Enhance ease of doing business through single-window clearance systems.

2. Strategic Initiatives

• Leverage the India-Japan Fund of $600 million for sustainable development projects.
• Strengthen the implementation of CEPA to boost bilateral trade.
• Focus on technology transfer and joint research initiatives.

The economic partnership between India and Japan holds immense potential, exemplified by initiatives like the Mumbai-Ahmedabad High-Speed Rail project. Strategic policy reforms and focused implementation of existing frameworks can help realize the full potential of this crucial partnership while addressing current constraints.