By AltG Research on behalf of Taponeel Mukherjee & Poornima Vardhan
India and Japan share a deep friendship with immense potential to drive economic growth and global prosperity. While the partnership between the two nations has been fruitful, the future holds tremendous potential for both. Japan recently announced an investment plan of $42 billion in India, highlighting the significant opportunities for growth and development and the “Invest India” motto. However, to unlock this potential, it is essential to understand that consumption and infrastructure are two sides of the same coin.
What's Been The Flow Of Japanese FDI Capital Into India vs The Rest Of Asia?
India received $2 Billion in 2020 versus $ 10 Billion in China and $18 Billion in Singapore. A majority of this was in infrastructure. Given the size and potential of India's economy, the India-Japanese economic cooperation must look to increase this number by 10X in the next 5 years to rapidly boost FDI in India.
Where Has Consumption Led Infrastructure Creation In India?
The answer is e-commerce led warehouse infrastructure. As the AltG Investment Index suggests, it is time for consumer markets to lead the way across the spectrum. In the warehousing markets in India, the growth of e-commerce spurred infrastructure creation. The ICRA report shows that overall supply warehouse space witnessed a 17% compounded annual growth rate between 2016 to 2021. This is a clear example of how building, facilitating, and financing consumer markets can create infrastructure and generate significant value for all stakeholders in the ecosystem.
What Is The Need Of The Hour?
The numbers above suggest clearly that the key takeaway is that the Indian-Japanese economic cooperation must look to increase the flow of Japanese FDI capital into India's consumer market. As India rapidly grows towards potentially becoming a $50 Trillion economy by 2050, the flow of capital is the single most significant factor that will drive the true potential of India. Indian consumption will drive the Indian economy. What's needed are financial structures, investment vehicles, and regulations that allow Japanese capital to fund the balance sheets of Indian companies.
What Are Japanese Investors Searching For?
No prizes for guessing this; yield is what investors seek. The search for yield and the need for yield in a relatively low-growth developed world is a reality. Japanese investors' holdings of US agency MBS have increased from $26 billion in 2003 to $306 billion in 2020. India has the potential to offer high growth opportunities to earn much-needed returns. Focusing on making fixed-income instruments like structures that allow yield-seeking investors to come into play is especially required.
Why Does "Productizing" Every Component Of The Balance Sheet Matter?
The Indian government and regulators need to work on "productizing" every component of the balance sheet to allow Japanese investors to participate further in the India growth story. The ability of India to create products out of every element of the balance sheet of Indian companies will be a crucial factor in facilitating the development of India's consumer markets and, consequently, the infrastructure markets. Making a product out of every component of the balance sheet of Indian companies matters because it helps facilitate the flow of capital and lowers the cost of capital. India can offer yield-seeking Japanese investors a product to solve their requirements while rapidly driving investments in India.
Investment vehicles and financial regulations that allow hybrid investments to medium-sized Indian businesses, packaged in a way that enables the eventual offering of rupee-based financial securities in yen denomination to Japanese investors will be the biggest driver of India-Japan economic cooperation. The ability to attract a plethora of Japanese institutions and retail investors into India is the key. The creation of financial infrastructure that can facilitate the flow of capital from Japanese retirees from Nagano to businesses in Noida and the return of investment back to the retirees will be the biggest driver of economic cooperation between the two nations.
In conclusion, India's consumer market is the single biggest strength India's growth story has, especially in the context of partnerships with countries such as Japan. The focus on direct infrastructure is essential; however, a way to facilitate greater infrastructure investment in India is by facilitating the flow of Japanese capital into India's consumer markets. India's rapidly growing consumer market is the opportunity Japanese pensions, megabanks, and larger investor bases need to tap into. This includes the creation of regulations, investment vehicles, and systems that allow Japanese capital to access opportunities in India's private markets. This will be a true win-win with India getting access to capital and Japan to returns from a rapidly growing Indian GDP.