Indian opportunities spice up Japanese corporate growth strategies

India is highly complementary to Japan in view of its rapid economic growth and rich talent pool.

  • Japanese companies are growing foreign direct investment in India in manufacturing, financial and other service sectors.
  • The number of Japanese corporations reporting sales from India is set to increase over the next two decades.
  • India’s macroeconomic fundamentals are the strongest in over a decade.

As India's economy continues to grow rapidly, Japanese companies and investors are showing heightened interest. In a ranking of countries seen as promising over the medium term in the Japan Bank for International Cooperation's FY23 survey on overseas business opportunities for Japanese manufacturing companies, India took the top spot for a second consecutive year, as China fell to No. 3.

Macroeconomic conditions in India are at their strongest in over a decade, with the GDP growth rate high, the rate of inflation in check, the budget deficit narrowing, and banking and corporate balance sheets robust. Stock markets in India look set to attract fund inflows under these stable conditions. With its vast pool of human resources, India offers highly complementary appeal for Japan, and it is also raising its profile in the country by means of foreign direct investment. As Japanese investment gets under way in earnest, India stands to benefit greatly.

India is in a macro sweet spot

Medium-term growth drivers in India are falling into place, led by increased infrastructure spends, shifts in global supply chains, climate-friendly policies, and productivity-enhancing initiatives like digitalization, all supported by favorable demographics. In Nomura’s base case scenario, India’s GDP growth could rise by 7% per annum between 2024 and 2028. As China’s economy slows, India is likely to be the fastest growing Asian economy this decade.

Stock markets in India also look set to attract fund inflows under these conditions. Nomura is positive on India equities from a medium- to long-term perspective, supported by a steady policy environment focusing on manufacturing and investment-led growth, a stable macro environment and strong domestic flows into equities. The earnings-to-GDP ratios of Indian corporates are also likely to continue improving.

Japan and India’s budding economic relationship

Although trade ties between Japan and India are currently weak, Japan's foreign direct investment in India has been gaining a growing presence in manufacturing, financial and other service sectors. The primary reasons for Japanese companies’ interest in India are growth prospects in local markets, the current size of local markets and inexpensive labor.

Portfolio investment also appears upbeat – Japanese investment in foreign equities as of end-2022 showed India at the top of the list for less economically developed countries, and Japanese individuals are investing more aggressively in Indian stocks by way of investment trusts.

Japanese companies are likely to boost their India presence

India sales accounted for only 0.3% of total sales at Japanese companies registered in India. Only fourteen Japanese listed companies disclosed Indian sales, but their share prices have outperformed the TOPIX index over the long term. This sales disclosure dynamic is reminiscent of Japan-China in the early 2000s. Shortly after China joined the World Trade Organization in 2001, it experienced rapid economic growth and Japanese companies disclosing China sales started to increase in 2010 through to 2021. Sales at operations in China at TOPIX constituents in FY22 was ¥21trn, or around 2% of their total sales, which is approximately ten times the level of sales at their India businesses.

Given the scope for longer-term economic growth in India, the number of Japanese companies reporting sales from India will likely increase over the next two decades, according to Nomura analysis. In addition to automobiles, infrastructure and construction, Japanese companies in India cover a wide range of other business areas including logistics, materials, real estate, human resources, general consumption, healthcare, agriculture, IT services and finance.

From an investment perspective, three types of companies are likely to expand their presence in India to the extent that they need to disclose local market sales. These are establishments that have not disclosed India sales, but have cited that market as the main factor behind guidance revisions as part of timely information disclosures, firms that have acquired Indian businesses or stakes in such corporations, and enterprises that are members of the Japan-India Association.

For a more in-depth analysis, read our full report.

Shunta Tachinaka, Aurodeep Nandi and Saion Mukherjee also contributed to this article.

Contributor

    Sonal Varma

    Sonal Varma

    Chief Economist, India and Asia ex-Japan

    Tomochika Kitaoka

    Tomochika Kitaoka

    Chief Equity Strategist

    Shinya Harui

    Shinya Harui

    Forex Analyst / Economist

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