Japanese ODA stimulates Indian infrastructure development

Authors: Rohit Sinha and Geethanjali Nataraj, ORF

Prime Minister Manmohan Singh’s recent visit to Japan will do as much to invigorate the Indian growth story as it will to strengthen diplomatic relations in the Asia Pacific.

Passengers travel in a New Delhi metro train. The system was built using Japan

With India investing heavily in infrastructure, Japanese assistance — both technical and financial — has been of great benefit. Japan’s post-war experience, leading to its subsequent economic boom in the 1970s, is a success story that India should seek to emulate.

Economic cooperation between the two countries was initiated in 1958 and has held strong ever since. The cooperation began with an official development assistance (ODA) loan — the first ODA loan Japan extended to any country. India is currently one of the largest recipients of Japanese ODA, receiving approximately ¥3,600 billion (US$36 billion) over the past few years. This assistance has helped India take massive strides in infrastructure development.

The most popular project funded by the Japanese is undoubtedly the Delhi Metro, a project that has now had a major impact on India’s city transportation systems. The project began in March 1995 and had a capital investment for phases I and II of US$2.7 billion. Around 60 per cent of this figure was financed through a loan from the Japan International Cooperation Agency. The success of the Delhi Metro project has prompted other Indian cities to develop their own metro systems; Japanese ODA is currently funding Bangalore and Chennai metro rail projects, besides providing expansion funding for expressway development, city ring-road projects and urban development projects.

The Japanese have also contributed significantly to the Delhi–Mumbai Industrial Corridor (DMIC) Project and the Chennai–Bengaluru Industrial Corridor. The DMIC is a Japanese–Indian collaborative project for comprehensive infrastructure development. It will create India’s largest industrial belt zone linking the industrial parks and ports of six states between Delhi and Mumbai in order to promote exports and FDI. The Japanese ODA loan will focus on constructing approximately 1,500 kilometres of track along the western corridor between the two cities, connecting major centres in the six states, as well as introducing electric locomotives capable of high-speed, high-capacity transportation. The project is expected to make a far-reaching contribution toward India’s economic development.

The economic impact of these projects is immense. The advantages of greater labour mobility courtesy of the Delhi Metro are evident in the number of satellite office districts that have been established around Delhi. But the Japanese have also aimed to achieve larger-scale socio-economic impacts, even though almost 95 per cent of ODA-related projects are in the infrastructure sector. For instance, safety measures at construction sites have been greatly enhanced. And the workflow is thoroughly organised, allowing for the timely completion of projects — Delhi Metro has completed its various sub-projects before schedule on more than one occasion.

The crucial role that infrastructure development plays in easing supply-side constraints to economic growth is well recognised. According to India’s 12th Five-Year Plan, around US$1 trillion is needed for infrastructure investment. This is no small number and much has to be done to facilitate easier borrowing, such as reforming the Indian capital market. The corporate bond market in India is still in its infancy. There is an increasing reliance on the private sector for developing and maintaining infrastructure, but such projects are capital-intensive and have a high gestation period. This problem is further compounded with most commercial banks and financial institutions having reached their exposure limits for funding infrastructure. Japanese ODA has eased the burden of borrowing in the Indian market, and with the Japanese economy still struggling to stimulate growth, investments in India are a way to earn extra income through interest.

The deepening ties between India and Japan are a step in the right direction for both countries. Many would argue that increasing Japanese interest in India is largely attributable to the deteriorating Sino–Japanese relationship. This may well be true: Japan may expect India to act as a counterbalance to China in the region and could therefore extend full support to India not only on the infrastructure front but also in key strategic areas, such as defence cooperation and civil nuclear technology. But from an Indian perspective, whatever Japan’s intentions may be, the contribution of Japanese ODA has been a huge help in bridging the infrastructure deficit in the country. The growing Japanese investment in infrastructure and the large number of Japanese factories shifting to India will be greatly beneficial to India. The increasing flow of Japanese FDI into India is also expected to give a huge boost to the Indian economy, which has been suffering from weak investor confidence over the last couple of years. Needless to say, China’s recent territorial actions only reinforce the logic of strong Indo–Japanese ties.

Rohit Sinha is a research intern at the Observer Research Foundation, New Delhi. 

Geethanjali Nataraj is Senior Fellow at the Observer Research Foundation, New Delhi.