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  India ahead of Japan

Vaiva Sapetkaitë, Institute of International Relations and Political Science Vilnius University
2014 08 07

According to the World Bank (WB), India is now the world’s third largest economy in terms of purchasing power parity, moving ahead of Japan which has been the third for a long time. The United States remains the world’s largest economy with 17.1 percent (of global output); the second is China (14.9 percent) and the third India (6.4 percent); Japan holds only a 4.8 percent share of global wealth. Presumably soon India will produce major share of global wealth, although during the recent years its economy has grown by only 5 percent.

Despite growing Indian economy, the country‘s social indicators dropped down. About one third of Indian population lives below the international poverty line, on less than $1.25 per day. According to the World Bank, India still accounts for one third of the world’s extreme poor. 

Thus, citizen of the world’s largest economies do not necessarily live an abundant life.  In 2013, the GDP per capita in Japan was recorded at $36.315, in India at $5.410.

In fact, Japan itself has substantially enhanced India’s economy. During the 8th decade of the last century big investments of Japan‘s Suzuki Motors corporation contributed to the production of Indian cars and facilitated general national technological developments. Since then Japan has been providing support to the country and now India is the main beneficiary of Japan. Japan‘s positive policy towards India could be explained by its attempts to offset the increasing China‘s economic and political influence in the region.

Without any doubt, for a country with largest population situation in agriculture remains very important. Although industry has been rapidly developing in India, first of all it is an agricultural country: about half of the country‘s population works in the agricultural sector. Unfortunately, old technologies and lack of investment to the Indian agricultural sector prevent from meeting the population’s food needs.

Japan‘s economy is also facing problems. A long-lasting political instability, large amounts of public debt, increasing burden on the working generation and ageing society might present numerous challenges. 

Recently Japanese Government has prompted a more determined response toward negative economic trends. When in 2012 Shinzo Abe was elected prime minister, positive economic changes have been observed in Japan, yet this might be a short-term effect. For instance, in April the Government raised Japan’s consumption tax from 5 percent to 8 percent, but this might reduce domestic consumption and slow down the recovering economy. 

In 2014 Japan‘s national debt exceeded $10.5 trillion, or 230 percent of national DGP; the worst thing is that this percent proceeds to grow. The rising public debt paralyses Japan‘s economy. Besides, growing number of senior citizens also hinders economic growth and increases public expenditure. As in many developing countries, in Japan focus was first of all given to education and career, and only then to family-building. Although the overall production efficiency is increasing, society is rapidly ageing and there is lack of working age population. 

Percentage of working age people in India is quite high. The majority of them are ready to work for lower wages (including highly qualified specialists) and this is relevant for business. Besides, due to long historical relationship with Great Britain, about 350 million Indians speak English. Thus, there is no wonder that many entrepreneurs widen up their business in India.  

Japan is also concerned about India. It is currently India’s fourth largest source of foreign direct investment. According to The Economic Times published in India, a lot of infrastructure mega projects in India couldn’t be implemented without Japan‘s support, namely: Delhi Metro, Delhi-Mumbai and Chennai-Bangalore industrial corridors etc.

Close personal ties of prime ministers of both countries (Shinzo Abe and Narendra Modi) and their similar visions also contribute to better relations between India and Japan. These visions are first of all directed to reforms promoting economic development. A new economic resurrection in Japan is commonly called abenomics, in Indiamodinomics.

Abenomics comprises three policy arrows: bold monetary policy, flexible fiscal policy and structural reforms. In case of successful liberalisation of economy, some Japan‘s problems could be solved. But local consumption in Japan is increasing slowly, the country also faces problems of export to developing country markets (2/3 of total export), and, most importantly, there the country needs to increase the share of the working-age population. Even a workaholic country like Japan will not be able to maintain economic prosperity alone.

 

 

 

Japan is still quite a homogeneous and isolated country. Although the above order made the country (in the second half of 20th century) one of the largest economies, in the global 21st age it has become a disadvantage. According to Japan‘s National Institute of Population and Social Security, the population will drop below 100 million in 2048, and nation will only have 87 million people by 2060. In view of this, Japan seeks to retain at least 100 million population by 2070. The country anticipates to provide favourable conditions for pregnant women and women raising children. Families raising two and more children will be assigned different privileges. Yet, even now it is obvious that this will not save the problem.

Although the majority of Japans are against emigration, the surveys demonstrate the following: Japan will have to accept about 200 thousand immigrants annually in order to reach the expected 2,07 child per woman. If the country wants to improve other indicators, the number of immigrants should even be higher. Yet, in 2010 the number of the legally resident foreign-born population in Japan amounted to only 2,1 million (about 70 percent of them Chinese, Philippines and Koreans), thus for Japan to accept 200 thousand foreigners per year would be a real challenge. 

Moreover, last year Japan‘s trade balance went negative for the first time since 1980 because many Japanese companies started shifting production overseas. This hits national economy and increases tension in the labour market. According to the British Economist, about one third of Japan’s production is produced abroad, and this is twice more than 20 years ago. Unfortunately, these trends are also increasing.

Japan’s economic development is also hindered by high taxes. The country’s effective corporate tax rate, at 41 percent, is the highest among G20 countries, and almost twice that of South Korea. This undermines Japan‘s competitiveness. Besides, Thailand with its trade agreements offering duty-free export of production, attracts Japanese industrialists.

These tendencies are likely to remain, although there is hope that this phenomenon will calm down. This could be achieved by simplifying tax environment (it is currently underway) or weakening Japanese Yen.

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