Though the Japan-India CEPA, then, might appear to be rather plain-vanilla in content, in this day and age of creeping protectionist sentiment, it is not something to be sneered at. Further, as Japan-India investment ties intensify across a swath of sectors, the trade benefits are expected to kick-in more forcefully.

Yet more than the CEPA, it is Japan’s investment in two transformational, and inter-linked, mega-projects in India’s infrastructural and industrial sector – the Dedicated Multimodal High Axle Load Freight (rail) Corridor project; the Delhi-Mumbai Industrial Corridor (DMIC) project – that embody the promise of the Japan-India trade and investment complementarity. Together, the 1,500 kilometer-long industrial corridor, complete with special manufacturing zones served by a high speed freight-rail and logistics network linking the dynamic growth nodes centered around the cities of New Delhi and Mumbai, embodies the potential to radically alter India’s light manufacturing sector. In time, it is envisaged, that as regionally-integrated production chains re-locate to within these investment zones and serve as key conduits of technology transfer and innovation, the corridor will serve as a catalyst to transforming India’s manufacturing sector on a scale similar to its farm sector transformation in the 1960s and 70s under the auspices of American ‘green revolution’ technology.

Of a magnitude as immense as the mega-projects’ potential are the structural disorders that bedevil India’s SME and light manufacturing sector, particularly when measured against its closest Asian and emerging economy peers. For a labor abundant and capital scarce economy, India’s industrial structure suffers from a SME cohort characterised by an acute dearth of medium and intermediate-sized labor-intensive firms. In excess of 85 per cent of manufacturing employment remains concentrated in micro-size enterprises of 10 employees of less – the dis-economies of scale, in turn, reinforcing the trend towards progressive fragmentation of manufacturing operations into ever smaller and uneconomical sub-contracting units. By comparison, even among its closest Asian and emerging economy peers, the proportion is less than 50 per cent. As such, on the productivity front, India’s labor-intensive, small-scale units contribution to overall manufacturing output and value added is disproportionately tiny – the productivity differentials between the largest-sized capital-intensive units and the smallest-sized ones being of the order of 8:1, as compared to the 3:1 differential amongst its east Asian peers.

At the export end, India remains the rare instance of an Asian economy that has witnessed a decline, both, in the relative share of manufactured exports within its overall export basket as well as in the export and import intensity of Japanese trade with the country – the latter as noted in a recent METI white paper. Further, even as its exports have increased rapidly at a rate of almost 20 per cent over the past couple of years (three times the rate of world trade growth), the high technology quotient of its merchandise trade has remained stagnant. In key technology sub-segments, such as office and computing machines and telecommunications and sound reproduction equipment, Indian exports have exhibited a decline in international competitiveness over the past decade.

Further, Indian SMEs have failed to integrate themselves within the vast labor-intensive rungs of the dynamic Asia-wide production networks for high-technology products. Incapable of specialising and growing within such vertical networks, India’s merchandise exports risk being condemned to a trade profile that is as traditional (gems, jewelry, textiles and leather goods) or capital-intensive (mining of metallic ores, petroleum extraction) in composition as it is stagnant in terms of value addition and technological improvement.

By contrast, the experience of the tiger economies of East Asia, and more lately China, is instructive: the cultivation of an outward-oriented industrial base populated with medium/intermediate-sized firms, plugged into region-wide production-sharing chains and paired with prudent macroeconomic management, can generate a virtuous cycle of high exports, savings and high technology-biased investment growth.

Given New Delhi’s failings, the DMIC investment bears a weight of expectations. Japanese efficiency-seeking investments – particularly in the transport, electrical equipment and machinery sectors – may relocate to industrial clusters within the corridor. A positive influence on Indian export-oriented light manufacturing could lead to a similar transformation to that of China’s eastern seaboard. With the industrial corridor’s master plan envisaging development of twenty four self-sustaining industrial cities across six states between Mumbai and Delhi over the next 30 years, perhaps along the way India’s own Shenzhen might also take flight.

That in the process of doing so, a trilateral trade format involving Japanese design inputs, Indian production-shared light manufacturing and American final goods consumption demand might also reinforce a trilateral geo-political co-dependency at a time when strategic experts from the three countries have been groping vainly for a way forward, is an added bonus.  Further, that Japanese cross-border, production-sharing affiliate operations in East Asia account for a sizeable chunk of the four million employed by Japanese overseas businesses is not too shabby either.

Will India be able to make this leap? It is not inconceivable. As late as 2000 the value of office and computing machines and telecommunications and sound reproduction equipment, two of China’s largest merchandise exports currently, stood below the $20 billion mark each. By mid-decade they had overtaken textiles and apparel and footwear and toys and had reached almost $90 billion and $70 billion, respectively. Yet such a scenario is hardly a given either. The legal framework of India’s industrial policy regime – land requisition and use policy, labor reform, bankruptcy laws, SME revitalisation strategy – remains behind the curve.

This second Manmohan Singh government, five hundred days into its tenure, has managed to marshal only one of eight legislative priorities from its original 100 day agenda through parliament doesn’t instill much confidence either. In any case, the Indian political and policy establishment horse has been brought to the water’s edge on the back of a conceptually thoughtful Japanese aid and investment initiative. Whether the horse is sentient enough, and its constituent parts sufficiently knit together, for it to drink on its own remains to be seen.

Sourabh Gupta is a senior research associate at Samuels International Associates, Inc and a contributor to EAF.