When Modi Met Abe: Asia's Strongest Democracies Are Joining Forces

Shinzo Abe with Narendra Modi. Wikimedia Commons/Creative Commons/Narendra Modi

Japan has persuaded India to abandon the artificial constraints of nonalignment.

Like every news event that shared last week with the U.S. presidential elections, Indian prime minister Narendra Modi’s visit to Japan was swallowed up by American electoral headlines. What attention his summit with Japanese prime minister Shinzo Abe did attract centered on the consummation of a long-pending nuclear cooperation deal. For a host of reasons covered extensively elsewhere, the deal is symbolically and practically significant for both countries.

This article is more concerned with what the Modi-Abe summit tells us about the increasingly robust strategic and defense partnership being forged by Asia’s democratic heavyweights, and how the summit advanced that partnership in several key areas.

Trade and Investment

Beyond the nuclear deal, the big-ticket takeaway from Modi’s visit was a deal to finance and construct a $15 billion Mumbai-Ahmedabad high speed rail project. Japan, which funded the lion’s share of the famed Delhi Metro, will finance 80 percent of the project with a soft loan at interest rates below 1 percent.

Japan has long been one of India’s largest aid donors and sources of foreign direct investment (FDI). Japanese FDI in India topped $17.5 billion between 2000 and 2014, with over 1,200 Japanese firms operating in India. “No nation has contributed so much to India's modernization and progress like Japan . . . And, no partner is likely to play as big a role in India's transformation as Japan,” Modi declared last year.

Bilateral trade, on the other hand, continues to underperform. In 2015–16 it reached a modest $14.51 billion, as compared with over $70 billion in India-China trade and $350 billion in Japan-China trade. As Pallavi Aiyar notes, Japan and India account for less than 2 percent of each other’s external trade, and “over the past three years Japanese firms have invested more in countries like Vietnam and Indonesia rather than India.”

Strategic Economic Cooperation

Despite this, India-Japan economic cooperation has begun to assume more overtly strategic dimensions. Consider their growing collaboration on Rare Earth Elements (REEs), a set of materials “used in high-tech gizmos from missiles to smartphones, wind turbines and electric cars.” REEs garnered global attention in 2010 following Japan’s detention of a Chinese fishing boat captain off the disputed Senkaku/Diaoyu islands. China, then responsible for 95 percent of global REE production, cut export quotas by 40 percent and halted supplies to Japan, sending prices soaring.

Tokyo, the world’s second-largest importer of REEs, panicked. India, with only modest REE deposits of its own, is also dependent on China for at least half of the dozen REEs it has designated as “critical” for its manufacturing sector.

Japanese firms have since partnered with India on a mineral separation plant in Odisha and an REE processing plant in Andhra Pradesh. In November 2012, the two signed a trade pact allowing India to export REEs to Japan. Under a follow-up deal reached in 2014, production is expected reach two thousand tons per year, or 15 percent of Japanese demand. This year, India’s first REE exports arrived in Japan.

Earlier this year, Japan also reportedly struck a deal to construct a fifteen-megawatt diesel power plant in India’s Andaman and Nicobar Islands. Delhi has traditionally “not previously accepted offers of foreign investment” on the distant island chain strategically positioned at the mouth of the Strait of Malacca. It’s been similarly averse to foreign investment in its underdeveloped, conflict-prone northeast, which is claimed in part by China as “South Tibet.” An exception has been made for Japan, however, which is currently funding a $744 million road-building project there.

Challenging OBOR?

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