Modi's visit to Japan

Modi is set to visit Japan from August 30 to September 3 and meet with his Japanese counterpart Shinzo Abe and Emperor Akihito, according to a statement from India's foreign ministry. The two countries are expected to formalize a "two-plus-two" bilateral framework between their defense and foreign ministers allowing for improved strategic communication.

The countries are also set to sign their first ever defense cooperation agreement, a move regarded by many as historic as it will be the first time Tokyo signs such a pact outside its traditional alliance partners US, Australia and Great Britain. Others believe the signing will send a strong signal to China. Modi will be hosting China's President Xi Jinping weeks after his meeting with Abe.

Rajiv Biswas, Asia-Pacific Chief Economist at the analytics firm IHS, says in a DW interview India is keen to build up ties with Japan as part of the Indian government's efforts to modernize its military and infrastructure with Japan seen as a source of leading edge defense equipment and advanced technology. However, he adds, India will want to retain its neutrality and maintain good relations with China, which is also an important economic partner for New Delhi.

DW: How important will this meeting be, and what will be topping Indian PM Narendra Modi's agenda in Japan?

Rajiv Biswas: Strengthening Indo-Japanese economic ties in trade and investment is a strategic priority for both Modi and Abe. The Indian subcontinent, with its large middle-class, provides a fast-growing market for Japanese multinationals as well as a low cost manufacturing hub for the future at a time when the Japanese domestic market is facing long-term structural weakness due to ageing demographics.

An important strategic priority for the Modi government will be to try to strengthen Japanese FDI inflows into India. A key focus of PM Modi's visit to Japan will be to persuade Japanese business leaders that the Indian investment climate will be much better under his government, and to attract Japanese FDI into India's infrastructure and urban development projects, notably the BJP government's plan for building 100 smart cities in India.

Moreover, a new defense co-operation pact will be a key priority for both PM Modi and PM Abe, while Modi will be keen to secure new Japanese investment flows into Indian manufacturing and infrastructure development.

How important is this defense cooperation pact for both countries?

Japan is keen to strengthen its defense ties with other friendly military powers as a bulwark against rising Chinese military power in the Asia-Pacific, particularly given the geopolitical tensions between China and Japan due to the territorial dispute over the sovereignty of the Senkaku/Diaoyu islets.

India is keen to build up ties with Japan as part of the Indian government's efforts to modernize its military, with Japan seen as a source of leading edge defense equipment and advanced technology.

Since Japan has never exported defense equipment before due to its own laws preventing such exports in the past, India has no previous experience of using Japanese defense equipment and therefore there will necessarily be a learning curve for both sides. However, India will want to retain its neutrality and maintain good relations with China, which is also an important economic partner for India.

What will the new military agreement entail?

The new defense co-operation agreement, which is expected to be concluded during Modi's visit to Japan, will provide a framework for defense exports, defense technology co-operation, joint military exercises and regular high-level bilateral military dialogue.

With the Abe government having relaxed export controls on Japanese defense exports in April 2014, it is likely that there will be considerable scope for defense industry exports and technological co-operation between both countries in the near future. There are expectations that a deal on the export of Japanese amphibious US-2 seaplanes for civilian search and rescue operations will be concluded during PM Modi's visit.

The Indian BJP-led government is keen to ensure that the Indian domestic defense industry develops rapidly, so the BJP policy focus will be on Indian joint ventures with Japanese defense companies and on locating defense manufacturing facilities for joint ventures with Japanese partners in India.

The two countries are also set to formalize a "two-plus-two" bilateral framework. What will this be about and how special is this?

India and Japan have already established bilateral "2+2" talks on foreign affairs and defense since 2010, but so far these talks have been held annually at the vice minister level. These talks are now set to be upgraded to the ministerial level, which will upgrade the dialogue to a very high level and make India only the fifth country with which Japan holds such high level dialogue.

Why is Japan so keen on upgrading its ties with India?

For decades, the Japanese industry was heavily focused on the Chinese market for trade and investment, due to the rapid growth of the Chinese economy and attractiveness of China as a location for low-cost manufacturing production. However, the deteriorating bilateral relations between China and Japan since 2011 as well as rapidly rising manufacturing wage costs in coastal China have forced Japanese multinationals to look beyond China at other Asian markets in SE Asia and the Indian subcontinent.

With the Japanese domestic market expected to be structurally weak for decades due to ageing demographics, India's large 1.2 billion population and fast-growing middle class presents an attractive growth market for Japanese multinationals. Moreover, the strong political and economic ties between Japan and India are seen as a good underpinning for strengthening bilateral relations.

What major business deals are to be expected from the visit?

Key areas where major business deals are expected are in energy, defense, manufacturing and infrastructure. Certainly Japan will be keen to promote the Shinkansen bullet train for high speed rail links between Indian cities, notably in the Delhi-Mumbai Industrial Corridor, for which Japan is a key partner.

One of the biggest opportunities for Japanese multinationals in India is in infrastructure development. Indian infrastructure is still very poor and is a major impediment to economic development. There has already been a very strong co-operation program underway between Japan and India for the development of urban metro rapid transit systems in a number of Indian cities.

The first of these projects was the Delhi Metro project, funded by soft loans from the Japan International Co-operation Agency (JICA). The first two phases of construction have been completed and in early 2014 Prime Minister Abe announced funding approval for a third phase. The tremendous success and popularity of the Delhi Metro has resulted in similar joint projects with Japan funded by JICA for other Indian cities, including Bangalore, Chennai and Kolkata.

A number of large Japanese multinationals have been among the contractors involved in the design and construction of the Delhi Metro project, including Mitsubishi Corporation, Sumitomo Corporation, Itochu Corporation and Shimizu Corporation.

A major joint project between Japan and India for infrastructure development that is already underway is the Delhi-Mumbai Industrial Corridor (DMIC). Around USD 90 billion of investment is projected for the DMIC megaproject, a joint Indo-Japanese project with a 26 percent equity stake from the Japanese Bank for International Co-operation in the DMIC Development Corporation.

There are a total of seven smart cities planned for the DMIC region. Japanese multinationals such as Hitachi and NEC are already involved in some of the infrastructure development projects underway in the DMIC.

What can you tell us about Japanese PM Shinzo Abe's admiration for India?

Prime Minister Abe has long regarded India as a strategic lynchpin for Japan's future economic and geopolitical security in the Asia-Pacific. He has also developed a very strong personal rapport with Indian Prime Minister Modi. This has set the foundation for a significant strengthening of Indo-Japanese political and economic relations under the Abe-Modi leadership.

What major challenges do the countries still have to overcome in order to improve bilateral ties?

Bilateral trade between Japan and India was 15.8 billion USD in 2013, still relatively low considering these are the second and third largest economies in Asia. Moreover, Indian bilateral trade with China was three times larger, at 65.5 billion USD in 2013. Therefore improving bilateral trade will be crucial to strengthening bilateral ties.

However, total cumulative Foreign Direct Investment (FDI) flows to India between 2007 and 2013 amounted to 21 billion USD, making Japan one of the leading sources of FDI into India. FDI momentum over the last three years has been relatively moderate compared to 2008-09, reflecting concerns amongst Japanese multinationals about the slowdown in Indian economic growth since 2010 and the weak business climate under the previous Indian government.

Japanese bilateral FDI flows to Thailand, Singapore, Indonesia and Vietnam over the last three years each exceeded Japanese FDI flows to India.

Rajiv Biswas is Asia-Pacific Chief Economist at IHS, a global information and analytics firm. He is responsible for coordination of economic analyses and forecasts for the Asia-Pacific region.