Japan Tops China in Race to Build India's First High-Speed Rail

  • $15 billion deal reflects close ties between Modi and Abe
  • Contract comes after China won Indonesian rail deal over Japan

India selected Japan to help build its first high-speed rail link in a coup for Prime Minister Shinzo Abe and a defeat for China, which also had bid for the signature project.

The $15 billion deal clinches three years of negotiations and reflects the deepening relationship between India and Japan stemming from the personal relationship between Prime Minister Narendra Modi and Abe. Shared investment objectives and a mutual apprehension about China’s expansionism are pushing the two nations closer together.

"No friend will matter more in realizing India’s economic dreams than Japan," Modi said Saturday at a joint news conference with Abe in New Delhi. The project "will launch a revolution in Indian railways and speed up India’s journey into the future."

Shinzo Abe And Narendra Modi
Shinzo Abe And Narendra Modi
Photographer: Money Sharma/AFP/Getty Images

The proposed 505-kilometer (314-mile) railway will link India’s financial capital of Mumbai with Ahmedabad, a major economic and industrial hub in Modi’s home state of Gujarat. Japan is offering about $12 billion of the 980 billion-rupee ($14.6 billion) cost, Modi said. The 50-year loan will carry an interest rate of 0.1 percent and a 10-year grace period, according to a copy of the agreement.

The deal comes after Japan lost out to China on a $5 billion rail deal in Indonesia in October. Along with the rail agreement, Modi and Abe signed accords on nuclear energy cooperation and defense equipment and technology transfers.

"Japan didn’t want to lose this deal," Purnendra Jain, a professor of politics and foreign policy at the University of Adelaide’s Centre for Asian Studies, said by e-mail. "It’s also a statement for Modi that India is modernizing."

Chinese Push

The loan requires that a Japanese company or a Japanese-Indian joint venture be appointed as the primary contractor on the project. Components to be manufactured in India include rolling stock, equipment and machinery. The two nations also agreed to explore cooperating on other high-speed rail projects in India.

China was pushing hard for the Mumbai-Ahmedabad project after signing an agreement with Modi in May to cooperate on railways. For the Indonesian project, China Development Bank provided three quarters of the required $5.5 billion funding.

Ahead of the announcement, Chinese Foreign Ministry Spokeswoman Hua Chunying was asked if China might lose because its loans were too costly.

"All countries have the right to make their own decisions about who they want to cooperate with," she told reporters in Beijing, adding that China expected to cooperate on other railway projects with India in the future.

Trade Imbalance

Despite losing the contract, China still dominates trade with both nations. Japan’s trade with India is about 5 percent of its commerce with China, and less than a quarter of India-China trade. 

Yet Abe’s government has outpaced China in investment pledges to India, promising to funnel about 3.5 trillion yen ($29 billion) in infrastructure loans, financing and public and private investment into India -- the most of any country except for the United Arab Emirates. Modi’s government has set up an office to promote investment from Japan, and the two leaders vowed last year to double direct investment in five years.

Abe announced that Japan will make 1.5 trillion yen in financing and export insurance available to Japanese companies seeking to enter the Indian market through the Japan Bank for International Cooperation and Nippon Export and Investment Insurance.

Japan is also set to provide 400 billion yen in official development assistance this financial year and another 200 billion yen in the following to support infrastructure projects in India, including roads in its northeast region, India Foreign Secretary S. Jaishankar said. One northeastern state, Arunachal Pradesh, is claimed by both India and China.

"In just about every area outside of defense, Indo-Japanese cooperation has been unprecedented," said Sasha Riser-Kositsky, a Washington-based associate for Eurasia Group. "In terms of putting up cold hard cash for the signature programs of the Modi government, it’s the Japanese companies and government. They have the institutional mechanisms for long-term concessional infrastructure financing."

Nuclear, Defense

Jaishankar told reporters in Delhi that the pact for nuclear energy could aid the participation of companies like General Electric Co. and Westinghouse Electric Co., which have Japanese partners, in India. Technical and legal details still need to be worked out, and a final agreement would also have to be approved by Japan’s Diet.

"The key part has been done," Jaishankar said. "The fact that we’ve concluded these negotiations is a very, very big step."

The nations signed two defense agreements for the transfer of military equipment and technology, as well as share classified intelligence. Under Abe, Japan has shifted away from 70 years of post-war pacifism, and the country recently lifted a decades-old ban on arms exports. The two leaders agreed to further discuss a potential deal for Japan US-2 amphibious aircraft, according to the joint statement.

Japan also will become a regular member of the India-U.S. Malabar naval exercises, which will "help create stronger capabilities to deal with maritime challenges in the Indo-Pacific region," the joint statement said. India and Japan share apprehensions about China’s expansionism in regional waters.

Modi and Abe discussed developments in the South China Sea and urged “ll states to avoid unilateral actions that could lead to tensions in the region.” China has been building facilities on artificial islands in the South China Sea, where it claims sovereignty.

The two leaders agreed to push for more cooperation with other regional powers, saying trilateral discussions with the U.S. and Australia contribute to a more "stable and transparent" architecture in the Indo-Pacific region. India and Japan agreed to hold a second joint meeting with Australia next year, according to fact sheet provided by Japanese officials to reporters.

"I cannot think of a strategic partnership that can exercise a more profound influence on shaping the course of Asia and our interlinked ocean regions more than ours," Modi said. "In a world of intense international engagements, few visits are truly historic or change the course of a relationship. Your visit, Mr. Prime Minister, is one."

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