Mid- to Long-Term Outlook for the Indian Economy: How to Assess the Indian Market―Benefits and Challenges of Japan-India Collaboration - proposal - Society of Security and Diplomatic Policy Studies

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Mid- to Long-Term Outlook for the Indian Economy:
How to Assess the Indian Market―Benefits and Challenges of Japan-India Collaboration

Go Yamada

Introduction

Extricating itself from the COVID-19 pandemic scourge and continuing economic growth at a rate approximating 7%, India with a population of over 1.4 billion―half of which is under the age of 25―is a huge, promising market. It will also serve as a hub for manufacturing, exports, and even research and development (R&D). Recently, Japanese economic circles have refocused on India. Leading Japanese companies in the automobile, home electric appliance, consumer goods, services and semiconductor industries are entering the country and expanding their investments in these sectors. On the other hand, the Indian economy also has problems like chronic inflationary trends, the unemployment of highly educated young people, the instability of the rupee, and the inadequacy of its infrastructure. It is almost undeniable that India will maintain a high growth rate in the medium- to long-term and become one of the leading economic powers; yet, there are various uncertainties involving the process and speed of its growth, making predictions difficult. This article will discuss, from a medium-to-long-term perspective, the potential of the Indian market, Japan's national interests associated with collaboration with India, security benefits including economic elements, and the risks inherent to India and the problems that need to be solved.

1. Growth Potential of the Indian Market

In December 2023, with the general election for the spring of the following year in sight, Indian Prime Minister Narendra Modi―who has started his twelfth year in office in May 2025―announced the national goal of joining the group of developed countries by 2047, the 100th anniversary of India's independence, coining the catchphrase "Viksit Bharat (Developed India) 2047." India has regained its vigor equal to that before the Corona pandemic; according to Goldman Sachs Research's report "The Path to 2075," India's GDP (2021 prices), which was about $2.8 trillion in 2020, is expected to expand to $13.2 trillion in 2040, roughly of the same size as Japan and ten ASEAN countries combined. There is no guarantee that the current upward growth trend will continue, but the direction seems correct.

According to the Japan Bank for International Cooperation (JBIC)'s annual survey of Japanese manufacturers (FY2024), 206 Japanese companies (about 59%) named India as the most promising country for them to do business in in the medium term (about three years), preferred to any other country for the third consecutive year. According to the Japan External Trade Organization (JETRO)'s FY2024 survey of Japanese companies doing business overseas, 77% of Japanese companies operating in India expected profits; 80.3% said they would "expand their business in India." Although we must consider decreases in the number of samples due to the withdrawal of mid-sized companies or their business downsizing affected by the COVID-19 pandemic, the results show that Japanese companies that have struggled for many years are now successful in the Indian market, aiming to expand their business.

The Indian market fascinates investors in many ways; its most significant advantage concerns India's demographic situation. India's population pyramid assumes the shape of a perfect triangle. Although some layers at the bottom have shrunk and the population growth rate has slowed in recent years, the demographic bonus will continue until the 2040s (Figure 1). Compared to middle-aged and older people, generally economical in expenditure due to their experiencing war and natural disasters, younger people are keen in the latest trends in new goods and commodities and tend to buy what they want at once, such as smartphones, digital home appliances, and motorcycles, even if it means taking out a loan.

Fig. 1 India's Demographic Pyramid (2024)

(Source) CIA Factbook 2024

Thanks to economic growth, many Indians have risen out of poverty and joined the middle class. According to estimates by the World Economic Forum (WEF), the number of middle-class households (an annual income of $4,000 to $40,000) that sustain domestic consumption will approach 80% of the total households by 2030. The WEF made this estimate in 2019 before the COVID-19 pandemic, which made the Indian economy stagnant for about three years; consequently, it will take more time for the WEF prediction to become a reality.

India's principal industries exhibit a definite trend of business expansion. According to the Society of Indian Automobile Manufacturers (SIAM), the number of passenger cars manufactured in India in FY2024 is 5.061 million (as of March 2025), the fourth largest in the world; the number of passenger cars sold at home is about 4.3 million, more than 1.5 times the FY2019 record before the outbreak of the COVID-19 pandemic. According to IDC, a research company specializing in IT and communications, India's domestic smartphone shipments in the 2024 calendar year is approximately 151 million units, which means that more smartphones than the population of Japan are sold annually in India.

The scale of the Indian economy is larger than it appears. Major contributors are service trade and remittances from abroad. In FY2024/25, India registered a trade deficit of more than $280 billion goods exports of $437.51 billion versus goods imports of $721.32 billion; however, service trade, such as software and IT-related products, scored a surplus of nearly $190 billion. According to the Reserve Bank of India (RBI), remittances from overseas Indian migrant workers in the 2024 calendar year reached $129.4 billion, up 17.3% from the previous year. If this is considered an "export of labor," India's trade balance will change to a surplus. Deposits for non-resident Indians (NRIs), who enjoy preferential interest rates, also expanded to $161.8 billion at the end of 2024 (up about 10% on a year-on-year basis).

Out of consideration for poor people and farmers, who are said to number more than 200 million in India, individuals with an annual income of 400,000 rupees (about 680,000 yen) or less will be exempt from income tax from FY2025; their agricultural income will not be subject to taxation either. In the first place, however, it is hard to find Indian citizens who fulfill the duty to declare their income honestly. This is a reason for the Indian government's heavy reliance on indirect taxes for revenue: "Goods and Services Tax (GST)," the unified nationwide consumption tax introduced in 2017, has been contributing to stead increases in tax revenue, almost doubling from 11.7 trillion rupees in FY2018 to 20.2 trillion rupees in FY2023. Tax avoidance practices of all kinds are still rampant in India, like the notorious practice of offering GST discounts on the condition of not issuing cash receipts. Enormous flows of underground money are also suspected.

2. The Modi Administration's Economic Policies

Many of the Modi administration's economic policies are well-targeted and intelligible for ordinary citizens; some have achieved tangible results. Especially noteworthy is the policy of promoting the manufacturing industry. Shortly after taking office in 2014, Prime Minister Modi launched the "Make in India" initiative, clarifying his intention to support the manufacturing industry, which brings jobs and technology to the country. By many accounts, the "Production Linked Incentive (PLI)" launched in 2020 is the most successful industrial policy. It is a system in which the government provides sales-linked subsidies for 14 sectors, including electronics, auto parts, and renewable energy. According to a government release, by August 2024, companies benefiting from PLI schemes had made investments of 1.46 trillion rupees and created 950,000 new jobs.

Another remarkable success is the "Insolvency and Bankruptcy Code (IBC)." India had long lacked an effective law providing corporate insolvency procedures. Facing the bad loan problem that had worsened since the late 2010s, the government ultimately started instituting a new law. The IBC strengthens the authority of creditors and stipulates that insolvency procedures should be completed within 180 days. The law facilitated and expedited insolvency procedures for large steel companies―Essar Steel and Bhushan Steel―, infrastructure firms, and real-estate-related companies. It took more than 30 years to implement the GST, from drafting a bill to its introduction. At this moment, it contributes to streamlining logistics and securing revenue.

Promoting the digital economy is one of the centerpiece policies of the Modi administration. Transactions in 2024 on the Unified Payments Interface (UPI), an electronic remittance system run by the National Payments Corporation of India (NPCI), amounted to 25 trillion rupees or approximately 16 billion in transaction numbers. The system is helping to spread cashless payments from fast food eateries to street food stalls. The semiconductor industry is deemed a game-changer for the Indian industry. The only thing India, a versatile producer of a broad spectrum of products from rockets to underwear, has failed to manufacture is semiconductors. Prime Minister Modi has long been aware of this, saying, "If things continue as they are, the amount of semiconductor imports will exceed that of crude oil," and has emphasized the significance of aiming for domestic semiconductor manufacturing.

India's semiconductor promotion measures turned out to be futile more than once. But the Indian Semiconductor Mission (ISM) launched in 2021 was a game changer; it opened the way for the federal and state governments together to subsidize up to 75% of private chip investments. Ultimately, Tata Electronics and others decided to build chip factories. Furthermore, following a US-India summit, Micron Technologies chose to do business in India. Thus, India has decisively steered toward its long-cherished goal of domestic semiconductor production. If chip factory construction proceeds smoothly, Indian-made semiconductors could debut on the world market by the end of 2025.

After the coronavirus crisis, India adopted the "infrastructure-led growth strategy" to restore its economy. The FY2025 budget bill allocated 15 trillion rupees (19.9% up from the FY2024 initial budget) for capital expenditure (CAPEX), including subsidies for state governments' infrastructure investment.

In the meantime, a fair number of policy measures and systems have been unsuccessful. A tax investigation into the BBC's Indian office in response to its critique of Prime Minister Modi has intimidated many media outlets into refraining from criticism out of consideration for the administration. Closer inspection of each policy measure would make it apparent that the Modi administration has made quite a few misjudgments.

A prime example is the three agriculture acts, or the so-called "New Farm Acts," including the Farmers' Produce Trade and Commerce (Promotion and Facilitation) Act, 2020, which came into force in September 2020, intending to reform the distribution of agricultural products. These acts were met with strong opposition from anxious farmers, who were suspicious of the government's decision to suspend purchases and who feared that large corporations would dominate the market. Consequently, they were abolished in just over a year. The 2016 overnight demonetization of 1,000 and 500 rupee banknotes aimed at exposing black money, but it fell short of its objective goal, dealing rather a mortal blow to small merchants and industrialists who relied on cash. The demonetization led to the rise of Paytm, a mobile payment pioneer, but its side effects cost a lot. The Modi administration's coronavirus countermeasures were also fraught with defects. It boasted that repeated strict lockdowns prevented the spread of infection, but the reality was very different. Prime Minister Modi's premature "declaration of victory over the coronavirus" was followed by a third wave of infection, resulting in more than 500,000 deaths. The Modi administration repeatedly suppressed public criticism by attributing economic problems, such as the slump in the automobile industry and sluggish investment growth around 2019, to the COVID-19 pandemic.

3. Japanese Companies Enjoy Booming Business in India

Since the mid-2000s, India has frequently been in the limelight in Japan, with India booms recurring. As mentioned earlier, nearly 80% of Japanese companies doing business in India are now in the black. Yet, it took them about five to ten years of perseverance until their business turned profitable. As of October 2022, 1,400 Japanese enterprises are doing business in India with about 4,900 outposts. The number of business outposts ultimately began to increase again after periods of a slight decline due to the COVID-19 pandemic.

Fig. 2 Japanese Companies and their Outposts in India (as of October of each year)

For many years, Japanese enterprises doing business in India were mainly automobile and home appliance companies. In recent years, notable has been the advent of service providers in the finance and insurance, advertising, and retail sectors, as well as consumer goods manufacturers involved in the restaurant, stationery, and food industries. Many Japanese companies entered the Indian market by acquiring an Indian company in the same industrial sector or through a joint venture (JV). Nippon Steel Corporation, which acquired Essar Steel jointly with European steel giant ArcelorMittal (AM), has announced plans to invest $30 billion over ten years and raise its annual crude steel production capacity to 40 million tons, more than four times the current level. Kirin Holdings invested in B9 Beverage as part of its beer business expansion in India. Nitori Holdings opened its first Indian outpost in Mumbai in December 2024.

Japanese companies that have already established themselves in India are also actively making additional investments. Suzuki Motor, the parent company of Maruti Suzuki, which has been operating in India for over 40 years, plans to invest 660 billion yen in its factories in Gujarat and other states to build a setup to manufacture 4 million vehicles annually. TOYOTA, which has been compensated for its delayed entry in the Indian market, plans to build a new factory in the western state of Maharashtra, with an investment worth 360 billion yen.

4. Functions Expected of India

India is not merely a large consumer market but also has the basic aptitude for manufacturing merchandise; it possesses a massive source of excellent science and engineering talent. The country performs a variety of functions. First, it is an export base for overseas markets. Expanding exports is a primary goal of the Indian industry; geographically, India is considered a promising export base for the Middle East, the east coast of Africa, and Europe. Another function to be undertaken by India is that of a research and development (R&D) base. Daikin, Nestlé, BASF, and other companies, not to mention IT and pharmaceutical companies, have already opened R&D facilities in India. The overriding advantage of India in this context is the availability of skilled engineers and designers at a relatively low cost. On top of these, India functions as an outpost for developing the Middle East and African markets. India has maintained close ties with African countries since its colonial days under the British Empire; there are many Indian residents in the African east-coast areas, especially Kenya and South Africa. Along with India's familiarity with Africa, foreign companies could have a great advantage in cultivating the African market, which would otherwise be hard for them. In the future, India is likely to be reconsidered as a source of human resources, not only for IT engineers but also for specialists such as caregivers.

5. Merits of Japan-India Collaboration

Collaboration between Japan and India has the potential to bring great mutual benefits. The high-tech sector―semiconductors and electronics―is the most promising area of bilateral cooperation. Japan, lagging behind in semiconductor manufacture, finds great benefits in teaming up with India, which is aiming to build a new supply chain. For Japan, collaboration with India may also contribute to upgrading security preparedness with a Taiwan emergency in mind. The semiconductor sector in India is developing under the leadership of the Tata Group and Micron. Tokyo Electron, Renesas Electronics, Hitachi High-Tech and Fujifilm are among those that have already entered, or decided to enter, the Indian semiconductor market. Digitalization is rapidly spreading in India, as shown by the fact that the country accounts for as much as 15% of the global output of Apple's iPhones. India will likely secure long-term supply contracts (offtake agreements), a prerequisite for semiconductor projects from automobiles and medical equipment to data centers.

Many are concerned about whether India can provide ultrapure water and a high-quality electric supply with a consistent voltage and frequency level, a prerequisite for semiconductor manufacturing. Yet, an executive at an Indian semiconductor-related company is confident that "the problems can be solved with the full involvement of the conglomerate giant Tata Group and the largest heavy engineering company Larsen & Toubro (L&T)."

Next is the defense and aerospace sector. At the 2017 Japan-India summit, both parties agreed on the joint development of defense equipment, including robotics. They also agreed to expand defense cooperation, represented by the Malabar maritime exercise involving Japan, the United States, Australia, and India, into the land and air domains. The Japan-India space dialogue is also underway; specifically, cooperation has begun between the Indian Space Research Organization (ISRO) and Japan Aerospace Exploration Agency (JAXA) on R&D of lunar exploration vessels. Furthermore, advanced bilateral collaboration is expected in fields such as IT―India's forte, particularly AI—and pharmaceuticals.

Africa, to which India, the self-designated leader of the Global South, is heavily committed, will likely become a theater of cooperation for Japan and India. In 2008, India established the India-Africa Forum, a framework for supporting Africa; at its third summit forum in 2015, India announced a $10 billion credit provision, $600 million worth of grant aid, and the acceptance of 50,000 African students. In 2023, India took up the G20 chairmanship and realized accession to the G20 of the African Union (AU), which consists of 55 African countries and regions. This move of India is based on its far-sightedness to maximize its national interests by committing to Africa through multilateral frameworks, since India alone cannot match China's financial power and mobility.

Needless to repeat, Africa is the mainstay of India's Global South strategy. India's ulterior motive is apparent: promoting exports of automobiles and pharmaceuticals to the rapidly growing African market and securing resources like crude oil. In particular, the joint exploitation of and concluding long-term supply contracts for critical minerals concentrated in Africa is an area where Japan and India's interests are identical in reducing dependency on China for vital materials. Japan's participation in such efforts makes sense. Indian companies have great potential to assist African countries, particularly by providing technology, supply chains and environmental protection expertise, all of which are lacking in these countries.

6. Remaining Factors Impeding India's Economic Growth

Despite its ostensible potential, the Indian economy is still fraught with many uncertainties. The gravest concern is inflation. Vegetables—tomatoes, onions, and potatoes (called "TOP," an acronym coined by local economists)—are widely distributed as foodstuffs for Indian households; however, their prices frequently soar due to poor harvests or bottlenecks in distribution channels. A result is great dissatisfaction among the masses whose lives are affected by rising prices, thus leading to a politically dangerous situation. Consequently, the Indian government and central bank prioritize controlling inflation and are hesitant to cut interest rates to bolster economic growth. The cost of living for ordinary citizens influences India's monetary policy.

Besides inflation, unemployment is another weakness of the Indian economy. According to the International Labor Organization (ILO), India's youth unemployment rate (15-29 years old) reached 26% in 2017; although lowering since then, it still exceeded 15% as of 2023. A survey disclosed that as of 2022, 82.9% of jobless people in India were young people. The situation, where the more educated people are, the fewer jobs they get, is a very worrisome circumstance for a developing country aiming for high growth. The alleged cause of unemployment is the lack of skills on the part of job seekers stemming from the inadequacy of college curricula. This is not something to fix all at once. The "Mood of the Nation (February 2025)," a biannual survey conducted by India's leading magazine "India Today," found that to the question "What has been the single biggest failure of the NDA government?", answers "price rise/inflation" and "unemployment" accounted for 21%, respectively, surpassing "economic growth" (7%) and "communal violence and fear among minorities" (5%).

Fig.3 What Has Been the Single Biggest Failure of the NDA Government?
(%) (Source) India Today poll survey "Mood of the Nation"

Another serious problem is the sluggish growth of investment in the manufacturing industry. According to the Ministry of Statistics and Programme Implementation (MOSPI), the gross value added (GVA, 2011 prices) of the manufacturing industry in the October-December 2024 period accounts for 16.4% of the total, lower than that of agriculture, forestry, and fisheries (17.6%). The employment rate in the manufacturing industry has also been stagnant at around 10% for a long time, lagging significantly behind Japan, China, and South Korea. The reasons for the stagnant manufacturing industry include not only sluggish productivity due to superannuated equipment but also the land acquisition law amended in a way favorable to sellers (farmers), raising the standard purchase price of land for factory use, and the labor laws that make it extremely difficult to dismiss laborers. Another adverse factor is Indian banks' reluctance to lend money and companies' declining willingness to invest due to the aftermath of the bad loan problem that emerged in the late 2010s.

India's list of problems continues. The chronic fiscal deficit is robbing India of a free rein in implementing its industrial policies. In fear of an influx of cheap agricultural products, India has effectively withdrawn from the Regional Comprehensive Economic Partnership (RCEP), thereby missing opportunities to expand exports. The government, "bold at home, shy outside," cannot decide to join the global FTA network, casting a dark shadow over the Indian economy.

The inadequacy of infrastructure and complex legal and tax systems combine to impede investment from abroad. Certainly, road construction is prospering across the country, and urban rapid transportations (Metro Railways) construction is progressing steadily in principal cities; however, these are not enough to attract manufacturing enterprises to India. Although India's legal and tax systems have been simplified and streamlined with the introduction of GST, many foreign companies in India say, "There is a gap between the systems/regulations and the interpretation and operation by on-site officials."

6. Summary

Given its growth potential and diverse functions like R&D, expectations are high for the Indian market. India's demographic bonus period, which will continue until 2040, may allow Japanese enterprises in India to evolve their business of the kind, demand for which has already saturated in Japan. Meanwhile, the Indian economy is plagued by weaknesses such as persistent inflation concerns and youth unemployment. Securing the quality and mobility of the labor force and promoting domestic capital accumulation pose significant challenges. The current inflow of foreign direct investment is inadequate, in comparison with India's vast potential.

Manufacturing and shipping products in a vast country requires enormous costs, and selecting land for an industrial park is anything but easy. In-depth due diligence is essential in establishing a joint venture with a local company or doing M&A. What we must understand in this context is that in India, politics do not necessarily prioritize economic growth. From a position of prioritizing domestic political stability, the government has worked to amend land acquisition and labor laws and addressed mass concerns about inflation―a hotbed of public discontent. Alongside the alleged 200 million poor, rural residents, who account for nearly 60% of the population, have equally the right to vote in elections; therefore, the old Asian model of economic development, focusing on nurturing only the middle class, is not practical. Prime Minister Modi's national goal of becoming a developed country by 2047 has, no doubt, given the people some euphoria. To achieve this, however, India must maintain an average annual economic growth of 7.3% for more than a score of years.

India is also perplexed a great deal by the Trump tariffs. Nonetheless, quite a few local economists concur that Trump's external pressure should be deemed an opportunity for domestic reforms. India's longstanding policies of protecting domestic industries by imposing high tariffs on imports, controlling imports with non-tariff barriers, and haphazardly encouraging domestic production are no longer effective.

For Japan, collaboration with India may be beneficial if it is associated with India's flourishing automobile sector, renowned IT industry, semiconductor production, electric vehicles, talented human resources, and joint efforts to secure resources by exploring the African market. The Japanese government's support for India and increasing cooperation between private enterprises of both countries are in line with the "Free and Open Indo-Pacific" initiative, which has now become Japan's diplomatic philosophy. It is crucial to be attentive to the problems and weaknesses inherent to India, but the need for Japan to work together with India is no doubt growing.

References and articles

Raghu Mohan, Cautious Optimism Business Today, Mar. 16 issue
PwC India India@2047 Feb. 2025
Nomura Research Institute, "Changes in Industrial Structure—the Key to India's Economic Development: Can DX Achieve Them?" NRI Journal, April 22, 2025

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