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India Under Narendra Modi Could Be Japan's Best Friend

A supporter of Narendra Modi dons a mask of the Hindu nationalist candidate

Photograph by Tsering Topgyal/AP Photo

A supporter of Narendra Modi dons a mask of the Hindu nationalist candidate

(Corrects date of election results in the first paragraph.)

The results of national elections in India, expected to be announced on May 16, could mean good news for Japan and not such good news for China. Narendra Modi, the leader of the Hindu nationalist opposition party, has long been a favorite of Japanese Prime Minister Shinzo Abe, who would like to foster military and economic ties with India. Modi, the front-runner in the contest to be India’s prime minister, and Abe also share an antagonism for China. Modi has criticized the government of Prime Minister Manmohan Singh for being too accommodating toward China and has pledged to take a tougher line on issues such as the border dispute between the two countries that has festered for decades.

Abe has clashed with China in a dispute over the ownership of several islands in the East China Sea. When it comes to the Chinese, “the Japanese are extremely apprehensive,” says P.K. Ghosh, senior fellow at the Observer Research Foundation, a New Delhi think tank. “It doesn’t take a genius to say India can be the largest friend of the Japanese.”

Abe has long treated Modi as a kindred spirit. Even after the George W. Bush administration put Modi on a travel blacklist for his alleged role in the 2002 riots that killed about 1,100 people, mostly Muslims, in Gujarat state, Abe welcomed Modi to Japan. The Indian politician, who was exonerated by the Indian courts, visited in 2007 during Abe’s first term as prime minister and then again when Abe was opposition leader in 2012. “Japan has worked very hard to improve relations with India,” says retired Indian General Vinod Saighal, author of Revitalising Indian Democracy. With a Modi victory, he says, relations “will get a boost, certainly.”

A “tremendous upswing” in security cooperation has already occurred between Japan and India, according to Ghosh. This year Japan will join in naval exercises with India and the U.S., and top defense and foreign ministry officials from Tokyo and New Delhi will start talks on closer ties. Negotiations are under way for Japan to sell amphibious aircraft to India. Japan also may sell India equipment for its nuclear power plants—something it had long been reluctant to do since India has refused to sign the nuclear nonproliferation treaty.

240K: Future annual auto production for Honda in India, double the level today

In a country in need of decent roads, more power plants, and other basic infrastructure, Japanese generosity plays a crucial role. The Japan International Cooperation Agency helped fund the Delhi Metro, India’s biggest subway system. Last September, JICA agreed to lend India, the largest recipient of Japan’s foreign aid, an additional 71 billion yen ($696 million) for the next phase of the Mumbai subway.

In China, companies such as Toyota (TM) and Panasonic (6752:JP) must worry about a repeat of the anti-Japanese violence that erupted in 2012 as the dispute over the islands, called Senkaku by Japan and Diaoyu by China, heated up. In India, no strong anti-Japanese movement exists, and companies are optimistic about gaining ground with Indian consumers. Panasonic has increased its market share of air conditioners in India, from 1.5 percent in 2010 to 15 percent, says Manish Sharma, managing director of Panasonic India. The company had revenue in India of $1.65 billion in the fiscal year ended March 2013—and it wants to more than double that to $3.6 billion in 2015.

Suzuki Motor (7269:JP) in January announced plans to spend 50 billion yen on a new factory in Gujarat that can produce 100,000 cars a year. A month later, Honda Motor (HMC) opened its second Indian factory in the state of Rajasthan, doubling its capacity to 240,000 vehicles annually, says Jnaneswar Sen, senior vice president for sales and marketing for Honda’s India business.

Although most of the investment flows from Japan to India, some Indian companies are building their Japanese business. Tata Consultancy Services (TCS:IN), the largest Indian IT outsourcer, has a small Japanese presence that it’s expanding through agreements with Nissan Motor (7201:JP) and Mitsubishi Motors (7211:JP) to provide Japanese companies with software services. TCS now has about 70 employees in India learning Japanese. Building a business in Japan will take time, because Japanese companies traditionally haven’t outsourced to India. Still, “it’s a market that has huge potential,” says TCS Chief Executive Officer Natarjan Chandrasekaran.

There are limits to how close Japan and India will likely get. Even Modi won’t want to risk fueling Chinese paranoia about an India-Japan-U.S. alliance. “We have to live with China,” says analyst Ghosh. “You can choose your friends, but you can’t choose your neighbors.”

The bottom line: The Japanese government hopes to foster greater defense and economic ties with India, in part to keep China at bay.

Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. Follow him on Twitter @BruceEinhorn.
Shrivastava is a reporter-at-large for Bloomberg News in Mumbai.

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