India-Japan Talks: A ‘Post-American’ Partnership?

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B Mathur / Reuters

Japan's Prime Minister Yoshihiko Noda shakes hands with his Indian counterpart Manmohan Singh as Noda's wife Hitomi and Singh's wife Gursharan Kaur look on during the ceremonial reception at the presidential palace in New Delhi, December 28, 2011.

With the Japanese Prime Minister Yoshihiko Noda completing his state visit to India this week, the relationship between these two Asian countries bears a close look. Their recent moves toward greater economic and political cooperation — one that goes beyond Japan’s recent reliance on soft-power influence — are more than just hedges against growing Chinese clout, although that’s certainly a part of it; they are also signs of a new reality in Asia, one in which the countries of this region are finding pragmatic ways to align their interests in the so-called post-American world.

In a joint statement signed on Wednesday, Noda and Indian Prime Minister Manmohan Singh made several important decisions. Diplomatic pronouncements such as these in Asia are often heavy on flowery language and light on substance, but not this one. It includes plans for joint naval exercises in the Indian Ocean, a $4.5 billion investment by Japan in a much-needed freight corridor between Delhi and Mumbai, and the expansion of an existing currency swap arrangement from $3 billion to $15 billion. Not bad for a two-day trip in the last week of a very difficult year.

Each of these agreements is interesting for different reasons. Pramit Pal Chaudhuri, writing for a Hindustan Times blog, neatly sums up India’s strategic calculus for the naval exercises with Japan:

India has shed a lot of its earlier inhibitions about looking anti-Chinese, especially after the past three years of bickering with Beijing. However, the present Indian ministry of defence is also wary of the U.S. Being Sino and Americo-skeptic, seeking a close defence relationship with Tokyo fits the ministry’s requirements perfectly.

India and the U.S. may be moving closer and closer together strategically, but India is still not ready to rely on the U.S. completely. Washington learned that lesson the hard way earlier this year with the ignominious end of its fighter-jet bid to India. Look for India to continue deepening its defense ties with other countries in the region even as it works more closely with the U.S. on security and intelligence in South Asia.

Japan’s big investment in the Delhi-Mumbai Industrial Corridor could give this project a boost. It is one of those unfortunate infrastructure projects in which the need is blindingly obvious — to link India’s two most important cities more efficiently for commercial traffic — but the reality of building it has proven frustratingly complex. Singh agreed on a “final concept note” for the DMIC in August 2007 with Japan’s Shinzo Abe, five prime ministers ago. Billions have been poured into it, but it’s still in the planning stages – with Indian politicians competing to make sure that a section of this potentially lucrative construction project goes through their areas and farmers, who stand to lose their land, agitating to make sure it doesn’t. Yet Abe and all his successors, including now Noda, remain committed to it. Whatever the difficulties of doing business in India, it is a consumer market that Japanese industry, particularly car-makers like Toyota, cannot ignore.

India has been extremely slow to build the infrastructure needed to make its consumers more accessible to the companies — foreign and domestic — that are desperate to reach them. There are multiple reasons, but among the biggest is a lack of a long-term debt market to finance them. It might sound arcane, but when I spoke to India’s big infrastructure companies this was the one thing they all named as a huge hurdle. Without a robust corporate bond market, they have to rely on short-term bank loans to finance their projects. Few companies are willing to put three-year, multi-billion-dollar bank loans on their balance sheets, so foreign capital has become crucial. Rather than waiting for India’s capital markets to mature, investors from Japan and elsewhere have been filling in the gaps.

The currency swap is a pressing need for India, which has seen the rupee fall to an “all-time low” against the dollar. The weaker the rupee is, the more expensive it becomes for Indian companies to buy the industrial and technological hardware they need to grow. Much of that plunge is due to skittishness from investors in the U.S. and Europe, who have been frustrated with the slow pace of economic reform in India and have their own economic crises to deal with. Conveniently, Japan has the opposite problem: the yen is rising against the dollar, making its exports more expensive for U.S. consumers, who can’t afford to buy them anyway. In his prescient book, my colleague Fareed Zakaria explains what it means for American power when other countries are on the rise. Here’s a corollary — even when they’re down, they don’t always need the U.S. to pick them up.