Japan finds new bright spots for investment in India #JapanFinance

New Delhi: Japanese investments in India are moving beyond the well-established patterns and are now exploring new avenues in financial services, electronics and telecommunications. According to Seiji Ota, partner at Deloitte India, Japanese investment patterns in India have evolved significantly over time.

“While the automotive and diversified industrial sectors have historically dominated Japanese capital allocation, recent years have witnessed a notable transformation in investment preferences. Financial services, electronics, telecommunications and media sectors have emerged as compelling destinations for Japanese investments,” Ota told ET. Cutting-edge domains such as semiconductor manufacturing, sustainable technologies, infrastructure development and defence capabilities are among the new spheres being explored by Japanese investors.

“This diversification reflects a broader strategic shift in Japanese investment philosophy in India, moving beyond traditional manufacturing strongholds to embrace emerging technological and strategic sectors,” Ota added. As per official data, foreign direct investment (FDI) inflows from Japan into India were $43.11 billion between April 2000 and September 2024. Japan is India’s fifth largest source of FDI, with a 6.08% share in total equity inflows.

According to a Deloitte report, India came in first and Vietnam second in a fiscal 2023 ranking of promising countries and regions for investment for Japanese firms. While there has been a recent decrease in mergers and acquisition activities between India and Japan, this was due to the Covid pandemic.

“The market has been seeing a revival of those activities. We already see a roughly 30% increase from 2023 to 2024 (as of December 2024), which implies the investment momentum is robust from Japan to India,” the report said, while adding that artificial intelligence, healthcare and renewables were key areas for dealmaking. Outbound deals from Japan to India stood at $1.22 billion (roughly 4.26% of total outbound deals $28.68 billion) during the first and second quarters of calendar year 2024. There were 343 inbound deals from Japan to India, resulting in investments of $62.35 billion during the past decade. Investments from India to Japan during this period totalled $4.85 billion. FDI flows to China have declined sharply, from a peak of $13.4 billion in 2012 to $3.4 billion in 2024. Conversely, FDI to India – $6 billion in 2024 – has been steadily increasing. The deal value peaked in 2021 with significant transactions such as Flipkart and Fullerton, suggesting tendencies to go for large deals, Deloitte said.Supporting factors
A national policy of fostering STEM (science, technology, engineering and mathematics) talent and escalating US-China tensions will further intensify the investments. “India and Japan have been benefiting from the ‘China Plus One’ strategy, as investors look for alternatives in the region to park their money,” the global consultancy major said in the report. Besides, there is also a huge potential for domestic demand to expand. India has a young population with an average age of 28 years and the largest working age population at 995 million in 2025. According to Deloitte, India is projected to post gross domestic product growth of 7.2% in 2024, followed by 6.6% in 2025 and 6.5% in 2026.

This means inflation growth will remain within the range of economic growth despite inflation spikes due to food prices. The stable growth outlook for the Indian economy contrasts starkly from a negative outlook on the Chinese and Japanese economies.

This is supplemented by a robust monetary policy and hefty foreign exchange reserves for India. In addition, India has a strong public investment climate with the rupee’s fluctuation against the dollar, yen and other key currencies remaining comparatively lower. Rohit Berry, president-strategy, risk and transactions at Deloitte South Asia, says India is taking bold steps to bolster its role in the global supply chain. “Successful partnerships between Indian and Japanese companies, coupled with sustained government support, will be pivotal in achieving this goal and enhancing the sector’s resilience,” he said. He highlighted India’s recent economic reforms, including reduced compliances, decriminalised provisions and structural changes like liberalised foreign investment, modernised bankruptcy and labour laws, and a unified GST, to have greatly enhanced its business environment.

“Ongoing efforts to simplify regulations, dematerialise shares, streamline KYC processes, and rationalise GST slabs will further boost its appeal to foreign investors,” Berry said.

Further, the Indian government’s support for manufacturing through production-linked incentive (PLI) schemes for 14 sectors, extending an incentive of 4-6% on incremental sales, greatly improves prospects. Japanese companies such as Panasonic, TDK, Daikin, Toshiba, NEC and Fujitsu have benefited from the PLI schemes. There are around 755 beneficiaries of the PLI schemes and around ₹1.5 lakh crore incremental investments of the targeted ₹3 lakh crore have already come in. There is a production increase in terms of sales of ₹12.5 lakh crore and employment generation for about 1.05 million people, both of which are a third of the original target.

Pli challenges
However, Deloitte said delays in incentive disbursement and approval processes, difficulties in meeting domestic value addition requirements within stipulated timeframes and steep year-on-year growth targets for revenue and production are some of the challenges with respect to the PLI schemes. Investors have also raised concerns on supply chain challenges such as an underdeveloped component ecosystem – particularly in electronics – and high dependency on imports for critical components and policy-related issues, including frequent changes in implementation guidelines.

(This article is published in partnership with Deloitte)