Products You May Like
The recent unveiling of a partnership with Japan is a step in India’s ongoing economic growth, one that highlights the investment strengths of developing economies.
Announced at the start of July, India and Japan’s broad economic and strategic collaboration represents a significant moment for the Indian economy. The bilateral investment partnership will increase India’s access to investment from one of the world’s leading economies while focusing on relations within Asia, rather than trade connections with Europe and America. This regional partnership is expected to bring greater stability to the Indian economy, by reducing reliance on short-term investments and unstable long-distance supply chains.
“Emerging economies cannot treat geopolitical disruption as a temporary external problem,” explains Rupin Banker, an investor with more than 30 years of experience in international trade and finance in India. “They must build partnerships that are more resilient, better capitalised and less dependent on short-term flows of capital. The India-Japan relationship is one of these,” says Rupin.
Over a 100 new business agreements have been signed as part of this growing partnership, and are forecast to bring $10 billion in investment into India.
Technology is one of the key areas, with the two governments agreeing to cooperate on batteries, green hydrogen and nuclear energy. This reflects a pattern of developing economies attracting capital via big tech. With the global economy dominated by investors chasing the next great leap forward, chip manufacturing, data centres, and associated activities have benefited countries across Asia. The head of the AI boom might be in Silicon Valley, but its body is spread across the globe.
Some of these developments in the technology sector fall within a group referred to in a recent World Bank document as “intangibles”. Economic fields such as software, R&D, and human capital can supposedly liberate developing economies from reliance on resource extraction and the unstable prices of the global marketplace. They are sometimes presented as an easy route out of old economic risks.
It’s an approach that has had its moments. Over the past two decades, human capital has been a strength for many developing countries, allowing them to tap into the global service economy. Services represented 45% of foreign direct investment in the early 2000s, growing to nearly 65% in 2019-23, as the global economy shifted emphasis away from manufacturing. Improved communications let developing nations take on a growing portion of this work, serving customers around the world. From Indian call centres to Philippine online assistants, international service work fuelled jobs and investment.
But the very technology creating new opportunities is starting to undermine that service economy. Instead of offshoring support work, American and European companies are turning to AI for customer services and administration tasks. While the service sector had many advantages over resource extraction, its greater stability is now in doubt.
The new deals being struck between India and Japan, alongside developments such as data centres in Indonesia, show a route to investment whose tangible assets make it more enduring. Investment in intangibles is, by its nature, not tied to a specific location. It is relatively easy to redirect that wealth when opportunities arise elsewhere. The service sector still has a lot of value for developing countries, as do work in software and R&D. But for developing countries to control their own destinies they need to embody their economic potential.
This is where other parts of the India-Japan relationship come in. Alongside investments in nuclear energy and battery manufacturing, the leaders of the two countries have announced a biogas initiative. Under this agreement, Japan will support the establishment of 1,000 biogas and organic fertiliser plants in India, resulting in substantial assets that can improve daily lives alongside the economy. It will provide vital resources for the growth of Indian industry and agriculture, as well as the capacity to export surplus fertiliser and energy.
“The countries that win capital in this decade will be those that convert ambition into credible infrastructure projects,” Rupin Banker explains. “This deal shows India’s growing ability to attract private and institutional capital from abroad, which it must now turn into lasting investment.”
To ensure that lasting investment, the government needs to build up local infrastructure, bolstering supply chains and skill bases to support a broader economy. But to attract those sorts of investments, they need a certain level of infrastructure and stability to start with. That means building roads, ports, and digital communication networks. It means establishing new infrastructure projects, not relying on what’s already in place.
In particular, it means extending that investment outside of the top cities where wealth and jobs concentrate. In India, lower tier cities contain 45% of the urban population and around 50% of SMEs, but they don’t currently provide an equivalent contribution to the economy. Beyond them, an estimated 95% of villages in India have internet access, providing more space for the digital economy to expand. By improving both digital and material infrastructure, the government can tap into under-utilised human resources and connect a whole country into the global economy, rather than relying on a few hubs. This would have knock-on effects in retail and manufacturing across the country, and provide an example for other developing economies.
The deal with Japan highlights India’s current strengths. Like other developing countries, it is attracting investment by focusing on the tech sector, which is increasingly dominant in the global economy, and whose high profile attracts investors. But rather than jump on the AI bandwagon, it is using that investment to build up fundamentals. From batteries to biogas, these projects will improve improve India’s energy systems and turn the country into a supplier for the rest of the world. Whatever twists and turns the technology sector takes, it will rely on that energy to keep running, removing the risk of the economy being undermined, as is happening in the international service industry.
By tapping into the tech sector and using its investments to build enduring infrastructure, developing countries can turn short-term trends into long-term growth. The intangibles might be attractive, but they rely on tangible assets underlying them. It’s by building up that infrastructure, not just in big cities but across the country, that developing economies set themselves up for the longer term.