infrastructure
STRATEGIC PARTNERSHIP BETWEEN INDIA AND JAPAN Forging a new era of finance and economics in Asia
Jan 2009 Japan-India Investment, Inc.
TODAY’S TOPICS
1. Japan's Experience 2. India’s Opportunities 3. Proposals for Partnership Appendix
Japan-India Investment, Inc.
-2-
1. Japan's Experience
Economic Achievements of Postwar Japan Normal postwar outcome
Rapid Rapid economic economic growth…. growth….
Social instability Gap between rich and poor
Energy supply & demand problems
Japan’s postwar outcome Become Become second second largest largest economy economy in in world world in in less less than than 30 30 years years
Society with Little disparity
Japan-India Investment, Inc.
Highly energyefficient society
-3-
Reference 1
Comparison of Social Disparities Within Countries Japan’s income distribution spread is the smallest of any developed country
Population distribution based on income
↑ Population Income
Share of income of lower10% Japan Finland Sweden France Canada Turkey UK Germany USA Mexico
4.8％ 4.1 3.4 2.8 2.7 2.3 2.1 2.0 1.8 1.2
Share of income of lower 20% Japan Finland Sweden Canada France Turkey UK Germany USA Mexico
10.6％ 10.1 9.1 7.3 7.2 6.1 6.1 5.7 5.2 3.4
Share of income
Share of income
of upper 20%
of upper 10%
Mexico Turkey USA Germany UK France Canada Japan Finland Sweden
57.6% 46.7 46.4 44.7 43.2 40.2 39.3 35.7 35.0 34.5
Mexico Turkey USA Germany UK France Canada Japan Finland Sweden
Note: Figures for the decade of the 1990s, based on documents created in 2004 by the Tax Commission Subcommittee on Fundamental Issues. Source: UN Human Development Index (2003), OECD, Employment, Labor and Social Committee (2000)
Japan-India Investment, Inc.
41.6% 30.7 30.5 28.0 27.5 25.1 23.9 21.7 20.9 20.1
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Reference 2
Long-term Trend in Income Disparity in Japan Income disparity shrank in postwar Japanese society Gini coefficient Prewar Prewar
Postwar Postwar
Minami 96
Otsuki-Takamatsu 78 Wada 75 Yoshida 93
Mizoguchi 74
Yugami 03
Note: Gini coefficient measures changes in pretax household incomes. The data is based as follows: Otsuki-Takamatsu 78: Long-term economic statistics for all households. Minami 96: Households in 210 cities, towns and villages. Mizoguchi 74: Household survey of working families. Yoshida 93: Comprehensive Survey of Living Conditions data in 10 clusters. Yugami 03: Comprehensive Survey of Living Conditions data in four clusters. Sources: Kazufumi Yugami, “How you evaluate income disparities in Japan, ” JIL labor policy report (2003.3) Toshiaki Tachibanaki, "Japan Economic Disparities," Iwanami Shinsho (1998) (Only used for Wada 75)
Japan-India Investment, Inc.
-5-
Reference 3
International Comparison of Energy Efficiency 1. Volume of crude oil consumption per unit of GDP Germany France Japan USA Taiwan Brazil South Korea India
405
2003: Barrels / million dollars
666 1,121
101
Japan
Northern Europe
117
117
USA
Germany
122
France
130
China
Steel - Unit energy consumption of integrated steelworks 1,371 100
105
110
120
Japan
South Korea
EU
USA
130
150
1,388 1,497
China
1,548
Thailand
100
463
1,526
Indonesia
Electric power - Calorific input per unit of electricity generated by thermal power plant
413
Philippines
Malaysia
2. Energy efficiency of different industrial sectors
China China (Large-scale) (All)
Cement - Energy consumption per clinker 130
1,835
131
145
152
South
Central & South America
China
177
100
1,989 2,070
Japan
Europe
Korea
USA
Sources: Nomura Asset Management Co. Sept. 2004 report on investment environment; BP Statistical Review; IMF statistics; Keidanren 2005
Japan-India Investment, Inc.
-6-
1. Japan's Experience
Basic Scheme of Support Underpinning Japan’s Growth World Bank loans, governance
Safe places to invest
Fiscal investment and lending
Postal savings Income redistribution Life insurance & financial infrastructure Pension
Tax revenues & usage fees (income tax, gasoline tax, etc.)
Technologies from US
Infrastructure Building Progressive tax Social security
Pacific Belt Zone Labor opportunities
1
Infrastructure building
２
z Accelerate the recovery by building of bullet trains, highways and other infrastructure z Economic expansion by added-profit trade in Pacific Belt Zone. z Also energized domestic economy by movements of goods and people
Emerging Consumer markets and other related industries
Social infrastructure building z At same time, built savings, pensions, healthcare and life insurance z Personal savings could be used for next investments on infrastructure z Redistributed income stabilized society and reduced regional disparities, and energized consumer markets
Japan-India Investment, Inc.
-7-
1. Japan's Experience
Learning from Japan’s Experience 1. Institutional design combining “hard” and “soft” infrastructure z Prioritize on profitable infrastructure z Build social and financial infrastructure to narrow income disparities 2. “Grand design” and up-front investments by central government z Local governments not cover inter-region and social infrastructure z Front-load funding for investment and recoup by economy expands 3. Preemptive initiative for mounting pressure for financial liberalization z Increased foreign reserves become pressure to reform financial system z Prepare a roadmap for economic expansion that incorporates it 4. Need to be a highly energy-efficient economy (becoming more important) z Energy-saving technologies to existing industries and products z Also introduce recycling and environmental technologies, agricultural technologies, etc. Japan-India Investment, Inc.
-8-
2. Opportunities
India’s Opportunities Strengths Land & Resources
Vast land and abundant resources z Agriculture and underground resources
Expansive manufacturing and service Business & Technologies sectors. Many world-class companies z Highly transparent stock market and 5,000 listed firms z Rapid growth in bio and IT sectors
Opportunities Infrastructure building and direct foreign investment should prime pump for broad growth in… z manufacturing z agriculture, forestry and fishing z and other sectors.
Consumer & Human Resources
1.1 billion people with youth-weighted pyramid shape z Low-cost, English-speaking, liberal economy
Broaden the consumer market by… z boosting demands and incomes z expanding financial and social infrastructure
Money & Finance
Investments and trade surplus-fueled growth in foreign investments z Increase in creditworthiness z Rupee trading at lower range
New opportunities for growth/initiative z latent demand for India government bonds and Rupee z Steps toward financial liberalization
Japan-India Investment, Inc.
-9-
Reference 4
Complementary Relationship of India and Japan India Land & Resources
Japan
Vast land and abundant resources
Second largest number of listed firms. Business & z Growth in agriculture, mining, Technologies manufacturing, IT and also bio and pharmaceuticals.
Small landmass and poor in resources High level manufacturing and service sectors and funding environment z as well as construction, environmental and agricultural technologies.
Consumer & Human Resources
Abundant, high-quality labor pool. Rich human resources in IT sector, but z still large number of farmers z 25% are poverty group
Large consumer market and greatly experienced people z On other hand, costs are high
Money & Finance
Nation’s financial assets are growing and pension, insurance and savings systems have room to develop. z Huge financial need for infrastructure investments.
World’s highest net external assets. Personal financial assets of \1,500 trillion. Developed financial market. z Fiscal & social security schemes in times of high growth.
Japan-India Investment, Inc.
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Reference 5
Japan’s Investments in India and China In India
Outstanding balance of investment trust funds (April 2006)
In China
\907 billion \568.3 billion
Reflects development of stock market and investors’ expectations.
4.6% % of direct investment outstanding balance (End of 2003)
Delay in infrastructure building so not connected to direct investments.
0.4%
Source: Reuters, Development Bank of Japan
Japan-India Investment, Inc.
- 11 -
2. Opportunities
Grand Design for Economic Growth in India (draft) Safe places to invest Postal savings Income redistribution Life insurance& financial infrastructure Pension Tax revenues & usage fees
India government Investments,Assurances and bonds advice Technologicalfrom Japan assistance from Japan
(income tax, gasoline tax, etc.) Build “hard” hard” infrastructure
Focus investing on highly profitable projects and powerful industries
1
Progressive tax Social security Labor opportunities
Infrastructure building
２
z Focus on profitable infrastructure/ industries – freight, airports, harbors, power plants. – Manufacturing, agriculture, etc. z Expand current “points” of infrastructure to “lines” and “planes.”
Social stability Consumer market Related industries
Social infrastructure building z At same time, built savings, pensions, healthcare and life insurance z Personal savings could be used for next investments on infrastructure z Redistributed income lead to stabilize society and energize consumer markets
“Central government” needs to take strong leadership. Japan-India Investment, Inc.
- 12 -
2. Opportunities
Roadmap to Economic Growth in India (draft) Step Step 1(Current) 1(Current) Point Point breakthroughs breakthroughs
Essential Investments and technologies
Step Step 22 Foundation Foundation building building
Step Step 33 Progressive Progressive expansion expansion
Growth of intellectual services sector z Outsourcing (IT, call centers) z Healthcare
Broaden industrial base z Construction z Manufacturing z Banking z Agriculture
Increasing national income leads progressive expansion of z Consumer market and related industries z Overseas deployment
Create “points” & “beachheads” z Cities of focus z Sectors of focus
Invest in “lines” to build foundation z High-return industrial infrastructure (freight, airports, harbors, power plants, etc) z Environmental infrastructure and technologies (Waste processing, cleaning)
Invest in “planes” to enhance foundation z Roadway infrastructure (General roads and freeways, and bullet train) z Enhance lifestyle infrastructure z Enhance information infrastructure (Broadband, mobile, etc.)
Disparities can easily become a problem
At same time, build social infrastructure z Savings, life insurance, pension, healthcare, etc. Japan-India Investment, Inc.
- 13 -
Summary of Proposals for Japan-India Strategic Partnership 1
Joint development of “hard” infrastructure and investment schemes z Invest up-front to ignite economic expansion z Paint financial picture that makes allies of investors
2
Promote bilateral investing in private sector z Expand opportunities to invest in Indian corporations z Expand contributions from Japan in agricultural and environmental technologies in addition to manufacturing.
3
Joint planning of social infrastructure z The “other wheel” balancing out building of hard infrastructure z Stable growth is essential in both economic and social terms
4
3. Proposals
See appendix
Advice on financial reform & globalization z Anticipate needs for financial reform that will arise with economic expansion. z Utilize Japan’s experience Japan-India Investment, Inc.
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3. Proposals
1
1 “Hard” Infrastructure and Investment Scheme The two countries cooperate to build “hard” infrastructure like rail, airports, harbors, and roads and infrastructure for transport and distribution Project planning and operation
Funding
Utilize India’s rapidly rising creditworthiness Jointly plan projects with high economic impact and profitability z Operating by India with technology and funds from Japan z Creditworthiness of public sector, project finance, z Set up Infrastructure Investment Company (IIC) real estate profits z These investments ignite funding from Japan Financial support Japan
Freight Financial support Airport
Infrastructure Investments
Plant
Highway
India
Loans
government
Investments
Harbor
Power
Investments
India government bonds Institutional investors India government bonds
Investment Investment Trust fund
Company
IIC set up by India government and companies
Investment
Loans
Investment (IIC)
government
Private investors
Investment Reduce costs of funding by using some of profits from infrastructure and real estate
Japan-India Investment, Inc.
huge latent demand in Japan for rupee-denominated fund z interest-rate differential z currency exchange fundamentals
- 15 -
3. Proposals
Funding Options (draft) Depository receipts
Investment trusts most realistic given current system Indian government bonds 1 for infrastructure building Issue Indian government bonds for specific projects and Infrastructure Investment Company (IIC) z Utilize the creditworthy of government bonds z Enable investing by individuals z Set rate lower and offer partial profit participation instead z Rupee bonds (attractive fundamentals)
Set up investment trusts for private investors from Japan to broaden funding to encompass individual and institutional investors z Handle rupee-denominated bonds and currency exchange for Japan’s financial institutes z If rupee-handling is
2
Warrant bonds for infrastructure building
IIC issues warrant bonds in financial markets in EU z Separate the bond portion from the subscription rights (profit participation) z As same function as rupee government bond by government-guaranteed bond portion z Cash flow from built infrastructure returned as dividend payouts. Investors can choose between bonds and profit-participation portions. z Handle rupee-denominated bonds and currency exchange for Japan’s financial institutes z If rupee-handling is restricted, do all transactions in yen
3 Securitized paper IIC issues bonds with ratings based on preferential performance z Denominated in rupee, dollar, euro, yen, etc. z high-risk equity portion are jointly invested by government and companies z Return cash flow from built infrastructure
Investors should benefit from infrastructure investment in accordance to risk tolerance z Handle rupee-denominated bonds and currency exchange for Japan’s financial institutes z If rupee-handling is restricted, do all transactions in yen
Japan-India Investment, Inc.
4
Preferred securities for infrastructure building
IIC issues non-voting preferred securities z Preferred securities similar in nature to stocks and with chance to reap profit from infrastructure investment z Will be desirable if redeemable (rupee-backed) and government guaranteed.
Issue depositary receipts of preferred securities on Tokyo Stock Exchange to procure yendenominated funds z Profits from infrastructure returned as yen to investors in preferred securities. z Procure funds from broad sources including individual and - 16 institutional investors,
APPENDIX Strategic Partnership between India and Japan Forging a new era of finance and economics in Asia Jan 2009 Japan-India Investment, Inc. Japan-India Investment, Inc.
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Appendix 1
Closing Gap with Taxes and Social Insurance Trend in Gini coefficient of income The Gini coefficient measures the inequality of income distribution. It takes a value of 0 to 1, where values closer to 0 indicate more equality.
Initial income
Income after redistributio n through taxation After redistribution through social security
Income after redistribution
“Initial income” is the total of income from employment, business, agriculture, dairy farming, property and work inside the home as well as .miscellaneous income and benefits privately received (remittances, corporate pensions, retirement benefits and life insurance money). “Income after redistribution through taxation” is initial income minus taxes (income tax, inhabitant tax, property tax (excluding business property taxes), as well as tax on cars and minicars (excluding commercial vehicles). “Income after redistribution through social security” is initial income plus medical cost and social security benefits minus social security expenses. “Income after redistribution” is (income after redistribution through social security) minus taxes. Income is per household. Source: Ministry of Health and Welfare “Income and Its Distribution Survey,” conducted every three years since 1972.
Japan-India Investment, Inc.
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Appendix 2
Post-Growth 1) National Assets and Fiscal Steering The 1980s
The 1990s and after
Industry
Japan’s industries on route to global industries. z Funding must also internationalize.
Post-bubble economic stagnation, but many companies step up their globalization efforts z Net external assets and foreign exchange reserves expand
Private
Steady asset management by people through their high propensity to save
National financial assets grow to reach \ 1500 trillion
Road-related tax revenues grew and all World Bank loans repaid in 1990 z Gas tax goes from \ 20 billion to 2 trillion
Huge fiscal deficit z Because scheme was not changed in postgrowth era
Fiscal
However, can’t put brake on development so issuing of construction bonds and other government bonds mushrooms.
The Thefailure failureofofgovernance governanceininthe the1980s 1980sled ledtotogrowth growthininfiscal fiscalspending, spending,but but industry and private economy are excellent and society is stable. industry and private economy are excellent and society is stable. zz Ample Amplemoney moneyare aresearching searchingfor forinvestment investmenttargets targets Japan-India Investment, Inc.
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Appendix 3
Post-Growth 2) Financial Era The 1980s
The 1990s and after
Finance
Financial liberalization z Want to change from loan financing to business in international capital markets z Foreign exchange, warrants, CBs, derivatives, etc.
Secondary financial big bang z Financial market opens to foreign capital (non-performing loans, corporate revitalization, investment management) z Policy of ultra-low interest rates
Internation al
US fiscal deficit balloons, becomes debtor nation z Japan and Germany possess huge amounts of US government bonds z With change in tax system, funds flow into US
The rise of China z China becomes major holder of US government bonds z Faces risks to resource and environment
Globalization of financial markets (after 1985) z US domestic market, Euro, German, Swiss, Japan domestic markets become global
Growth Growthofofmanufacturing manufacturingand andservice servicesectors sectorsand andforeign foreignreserves reservesbring bringstrong strongpressure pressure on financial system to open. on financial system to open. zz Japan Japanhas hasexperience experiencetaking takingsteps stepstotoopen openmarket marketwith witheye eyeon oninternational international markets and domestic climate markets and domestic climate Japan-India Investment, Inc.
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Appendix 4
China’s Growth – Chance and Paradoxes China
Employment Capital Growth
↑ ↑ ↑
Direct investments / factory relocationsInitial
Exports Surplus
State-owned companies↓ Non-performing loans↓ Share prices ↓ Disparities ↑ Corruption ↑ Political tensions ↑
U.S.
Trade balance
Deficit
Foreign reserves & securities investments (mainly US bonds)
employment ↓ Corporate earnings ↑ Share prices ↑
Securities, property Pensions investing & speculation Currency peg, huge impact of US$ Interest rates
& assets ↑ Consumption ↑
Employment Resources Resources & & environment environment are are bottlenecks bottlenecks Real estate z z US$ US$ rates, rates, rising rising oil oil prices prices are are risk risk factors factors Japan-India Investment, Inc.
↑ ↑
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Proposal 1
Given Current System, Investment Trust is Realistic Current Situation Currency exchange of rupee is not being conducted in Japan. z Rupee-denominated savings and even taking the rupee out of India is not possible. Investing through funds is the only way for Japanese individual investors to access India’s securities markets z India fund became very popular; have surpassed China funds to reach \900 billion z Only institutional investors can trade rupee-denominated India government bonds in India’s markets. z India has not issued dollardenominated government bonds. Japanese investors have a huge appetite for non-Japanese bonds. z The outstanding balance of the Global Sovereign Open fund exceeded \5 trillion (in December 2005)
Proposed Schemes for Eliciting Investments from Japan Yen-denominated investment trust funds is realistic? z Convert to rupees via fund z Corporate bonds, CBs, warrant bonds and shares issued by Infrastructure Investment company z Target return of 5% plus project revenues. Monthly distributions, etc. z Joint investments with investors in India. Reasoning: 1. Realistic within current system. z Currency exchange via fund z Need it be registered in Mauritius? 2. Japanese investors have a huge appetite for foreign bonds z Not stable if only of stocks. z Interest rate differential with Japan 3. Ensure access by jointly investing with Indian investors Japan-India Investment, Inc.
Items Requiring Study 1. The possibility of issuing purpose-specific Indian government bonds. 2. The investment portfolios of India’s domestic investors. 3. Readiness for time when rupee becomes a key currency. 4. The possibility of reduced regulations on foreign investment in specific industries. 5. Depositary Receipts in TSE. Infrastructure Investment Company (IIC) issues DRs on TSE to procure yen z IIC guaranteed by government. z Preferred stock for higher dividend rate Æ Creates same result as a yen-denominated Indian government bond z If TSE proves difficult, issue dollar- and euro-denominated - 22 paper on Euromarkets.
Proposal 2
2
2 Promote Bilateral Investing in Private Sector
India’s leading companies list on Japan’s stock market to procure funds z Easier for Japanese individual investors to invest in companies of India Japan’s established technologies and brands facilitate strategic partnerships and M&As between companies in India and Japanese companies, whose growth has slowed amid a shrinking domestic market. z Expected to improve access to markets of India and world using India’s personnel and markets Japan-India Investment, Inc.
- 23 -
Proposal 3
3
3 Build Social Infrastructure
Build social infrastructure z Pension z Healthcare z Life insurance z Savings
Essential to stable economic growth 1. Income redistribution enhances all 2. Amassing of individual financial assets 3. Source of funds for “hard” infrastructure 4. Expand financial, stock and bond markets as services to manage assets increase.
Experience-based advice from Japan and joint research will be beneficial z Universal care realized in field of social security. World's highest longevity rate, and little social disparity. z Experience with financial system using social security and private savings for “hard” infrastructure, helping ensure social stability and long-term economic growth. z Also experience with the limited fiscal management. Japan-India Investment, Inc.
- 24 -
Proposal 4
4
4 Financial Reform and Globalization Financial reform
Globalization
1. Develop government bonds market z Phase out bank’s forced savings z At same time, enhance social security and divert funds to government bonds z Boost productivity of banking sector and expand credit
1.
Turn rupee into international currency and begin offshore trading z With direct foreign investments and balance of external payments, turn India into a capital surplus country z Need for international fund recycling
2. Reform, privatize and liberalize financial services. z Reform and privatize state-owned firms including banks, securities firms and insurance firms z Entry of private and foreign companies z Entry of Japanese financial institutions into India (essential step for entry of other Japanese firms)
2. Strategic planning for globalization z India needs strategy to face pressure like Japan faced to open its financial markets and to respond to calls regarding domestic situation and economic expansion
Experience-based advice from Japan and joint research will be beneficial in this regard, too. Japan-India Investment, Inc.
- 25 -
Jan 2009 Japan-India Investment, Inc.
TODAY’S TOPICS
1. Japan's Experience 2. India’s Opportunities 3. Proposals for Partnership Appendix
Japan-India Investment, Inc.
-2-
1. Japan's Experience
Economic Achievements of Postwar Japan Normal postwar outcome
Rapid Rapid economic economic growth…. growth….
Social instability Gap between rich and poor
Energy supply & demand problems
Japan’s postwar outcome Become Become second second largest largest economy economy in in world world in in less less than than 30 30 years years
Society with Little disparity
Japan-India Investment, Inc.
Highly energyefficient society
-3-
Reference 1
Comparison of Social Disparities Within Countries Japan’s income distribution spread is the smallest of any developed country
Population distribution based on income
↑ Population Income
Share of income of lower10% Japan Finland Sweden France Canada Turkey UK Germany USA Mexico
4.8％ 4.1 3.4 2.8 2.7 2.3 2.1 2.0 1.8 1.2
Share of income of lower 20% Japan Finland Sweden Canada France Turkey UK Germany USA Mexico
10.6％ 10.1 9.1 7.3 7.2 6.1 6.1 5.7 5.2 3.4
Share of income
Share of income
of upper 20%
of upper 10%
Mexico Turkey USA Germany UK France Canada Japan Finland Sweden
57.6% 46.7 46.4 44.7 43.2 40.2 39.3 35.7 35.0 34.5
Mexico Turkey USA Germany UK France Canada Japan Finland Sweden
Note: Figures for the decade of the 1990s, based on documents created in 2004 by the Tax Commission Subcommittee on Fundamental Issues. Source: UN Human Development Index (2003), OECD, Employment, Labor and Social Committee (2000)
Japan-India Investment, Inc.
41.6% 30.7 30.5 28.0 27.5 25.1 23.9 21.7 20.9 20.1
-4-
Reference 2
Long-term Trend in Income Disparity in Japan Income disparity shrank in postwar Japanese society Gini coefficient Prewar Prewar
Postwar Postwar
Minami 96
Otsuki-Takamatsu 78 Wada 75 Yoshida 93
Mizoguchi 74
Yugami 03
Note: Gini coefficient measures changes in pretax household incomes. The data is based as follows: Otsuki-Takamatsu 78: Long-term economic statistics for all households. Minami 96: Households in 210 cities, towns and villages. Mizoguchi 74: Household survey of working families. Yoshida 93: Comprehensive Survey of Living Conditions data in 10 clusters. Yugami 03: Comprehensive Survey of Living Conditions data in four clusters. Sources: Kazufumi Yugami, “How you evaluate income disparities in Japan, ” JIL labor policy report (2003.3) Toshiaki Tachibanaki, "Japan Economic Disparities," Iwanami Shinsho (1998) (Only used for Wada 75)
Japan-India Investment, Inc.
-5-
Reference 3
International Comparison of Energy Efficiency 1. Volume of crude oil consumption per unit of GDP Germany France Japan USA Taiwan Brazil South Korea India
405
2003: Barrels / million dollars
666 1,121
101
Japan
Northern Europe
117
117
USA
Germany
122
France
130
China
Steel - Unit energy consumption of integrated steelworks 1,371 100
105
110
120
Japan
South Korea
EU
USA
130
150
1,388 1,497
China
1,548
Thailand
100
463
1,526
Indonesia
Electric power - Calorific input per unit of electricity generated by thermal power plant
413
Philippines
Malaysia
2. Energy efficiency of different industrial sectors
China China (Large-scale) (All)
Cement - Energy consumption per clinker 130
1,835
131
145
152
South
Central & South America
China
177
100
1,989 2,070
Japan
Europe
Korea
USA
Sources: Nomura Asset Management Co. Sept. 2004 report on investment environment; BP Statistical Review; IMF statistics; Keidanren 2005
Japan-India Investment, Inc.
-6-
1. Japan's Experience
Basic Scheme of Support Underpinning Japan’s Growth World Bank loans, governance
Safe places to invest
Fiscal investment and lending
Postal savings Income redistribution Life insurance & financial infrastructure Pension
Tax revenues & usage fees (income tax, gasoline tax, etc.)
Technologies from US
Infrastructure Building Progressive tax Social security
Pacific Belt Zone Labor opportunities
1
Infrastructure building
２
z Accelerate the recovery by building of bullet trains, highways and other infrastructure z Economic expansion by added-profit trade in Pacific Belt Zone. z Also energized domestic economy by movements of goods and people
Emerging Consumer markets and other related industries
Social infrastructure building z At same time, built savings, pensions, healthcare and life insurance z Personal savings could be used for next investments on infrastructure z Redistributed income stabilized society and reduced regional disparities, and energized consumer markets
Japan-India Investment, Inc.
-7-
1. Japan's Experience
Learning from Japan’s Experience 1. Institutional design combining “hard” and “soft” infrastructure z Prioritize on profitable infrastructure z Build social and financial infrastructure to narrow income disparities 2. “Grand design” and up-front investments by central government z Local governments not cover inter-region and social infrastructure z Front-load funding for investment and recoup by economy expands 3. Preemptive initiative for mounting pressure for financial liberalization z Increased foreign reserves become pressure to reform financial system z Prepare a roadmap for economic expansion that incorporates it 4. Need to be a highly energy-efficient economy (becoming more important) z Energy-saving technologies to existing industries and products z Also introduce recycling and environmental technologies, agricultural technologies, etc. Japan-India Investment, Inc.
-8-
2. Opportunities
India’s Opportunities Strengths Land & Resources
Vast land and abundant resources z Agriculture and underground resources
Expansive manufacturing and service Business & Technologies sectors. Many world-class companies z Highly transparent stock market and 5,000 listed firms z Rapid growth in bio and IT sectors
Opportunities Infrastructure building and direct foreign investment should prime pump for broad growth in… z manufacturing z agriculture, forestry and fishing z and other sectors.
Consumer & Human Resources
1.1 billion people with youth-weighted pyramid shape z Low-cost, English-speaking, liberal economy
Broaden the consumer market by… z boosting demands and incomes z expanding financial and social infrastructure
Money & Finance
Investments and trade surplus-fueled growth in foreign investments z Increase in creditworthiness z Rupee trading at lower range
New opportunities for growth/initiative z latent demand for India government bonds and Rupee z Steps toward financial liberalization
Japan-India Investment, Inc.
-9-
Reference 4
Complementary Relationship of India and Japan India Land & Resources
Japan
Vast land and abundant resources
Second largest number of listed firms. Business & z Growth in agriculture, mining, Technologies manufacturing, IT and also bio and pharmaceuticals.
Small landmass and poor in resources High level manufacturing and service sectors and funding environment z as well as construction, environmental and agricultural technologies.
Consumer & Human Resources
Abundant, high-quality labor pool. Rich human resources in IT sector, but z still large number of farmers z 25% are poverty group
Large consumer market and greatly experienced people z On other hand, costs are high
Money & Finance
Nation’s financial assets are growing and pension, insurance and savings systems have room to develop. z Huge financial need for infrastructure investments.
World’s highest net external assets. Personal financial assets of \1,500 trillion. Developed financial market. z Fiscal & social security schemes in times of high growth.
Japan-India Investment, Inc.
- 10 -
Reference 5
Japan’s Investments in India and China In India
Outstanding balance of investment trust funds (April 2006)
In China
\907 billion \568.3 billion
Reflects development of stock market and investors’ expectations.
4.6% % of direct investment outstanding balance (End of 2003)
Delay in infrastructure building so not connected to direct investments.
0.4%
Source: Reuters, Development Bank of Japan
Japan-India Investment, Inc.
- 11 -
2. Opportunities
Grand Design for Economic Growth in India (draft) Safe places to invest Postal savings Income redistribution Life insurance& financial infrastructure Pension Tax revenues & usage fees
India government Investments,Assurances and bonds advice Technologicalfrom Japan assistance from Japan
(income tax, gasoline tax, etc.) Build “hard” hard” infrastructure
Focus investing on highly profitable projects and powerful industries
1
Progressive tax Social security Labor opportunities
Infrastructure building
２
z Focus on profitable infrastructure/ industries – freight, airports, harbors, power plants. – Manufacturing, agriculture, etc. z Expand current “points” of infrastructure to “lines” and “planes.”
Social stability Consumer market Related industries
Social infrastructure building z At same time, built savings, pensions, healthcare and life insurance z Personal savings could be used for next investments on infrastructure z Redistributed income lead to stabilize society and energize consumer markets
“Central government” needs to take strong leadership. Japan-India Investment, Inc.
- 12 -
2. Opportunities
Roadmap to Economic Growth in India (draft) Step Step 1(Current) 1(Current) Point Point breakthroughs breakthroughs
Essential Investments and technologies
Step Step 22 Foundation Foundation building building
Step Step 33 Progressive Progressive expansion expansion
Growth of intellectual services sector z Outsourcing (IT, call centers) z Healthcare
Broaden industrial base z Construction z Manufacturing z Banking z Agriculture
Increasing national income leads progressive expansion of z Consumer market and related industries z Overseas deployment
Create “points” & “beachheads” z Cities of focus z Sectors of focus
Invest in “lines” to build foundation z High-return industrial infrastructure (freight, airports, harbors, power plants, etc) z Environmental infrastructure and technologies (Waste processing, cleaning)
Invest in “planes” to enhance foundation z Roadway infrastructure (General roads and freeways, and bullet train) z Enhance lifestyle infrastructure z Enhance information infrastructure (Broadband, mobile, etc.)
Disparities can easily become a problem
At same time, build social infrastructure z Savings, life insurance, pension, healthcare, etc. Japan-India Investment, Inc.
- 13 -
Summary of Proposals for Japan-India Strategic Partnership 1
Joint development of “hard” infrastructure and investment schemes z Invest up-front to ignite economic expansion z Paint financial picture that makes allies of investors
2
Promote bilateral investing in private sector z Expand opportunities to invest in Indian corporations z Expand contributions from Japan in agricultural and environmental technologies in addition to manufacturing.
3
Joint planning of social infrastructure z The “other wheel” balancing out building of hard infrastructure z Stable growth is essential in both economic and social terms
4
3. Proposals
See appendix
Advice on financial reform & globalization z Anticipate needs for financial reform that will arise with economic expansion. z Utilize Japan’s experience Japan-India Investment, Inc.
- 14 -
3. Proposals
1
1 “Hard” Infrastructure and Investment Scheme The two countries cooperate to build “hard” infrastructure like rail, airports, harbors, and roads and infrastructure for transport and distribution Project planning and operation
Funding
Utilize India’s rapidly rising creditworthiness Jointly plan projects with high economic impact and profitability z Operating by India with technology and funds from Japan z Creditworthiness of public sector, project finance, z Set up Infrastructure Investment Company (IIC) real estate profits z These investments ignite funding from Japan Financial support Japan
Freight Financial support Airport
Infrastructure Investments
Plant
Highway
India
Loans
government
Investments
Harbor
Power
Investments
India government bonds Institutional investors India government bonds
Investment Investment Trust fund
Company
IIC set up by India government and companies
Investment
Loans
Investment (IIC)
government
Private investors
Investment Reduce costs of funding by using some of profits from infrastructure and real estate
Japan-India Investment, Inc.
huge latent demand in Japan for rupee-denominated fund z interest-rate differential z currency exchange fundamentals
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3. Proposals
Funding Options (draft) Depository receipts
Investment trusts most realistic given current system Indian government bonds 1 for infrastructure building Issue Indian government bonds for specific projects and Infrastructure Investment Company (IIC) z Utilize the creditworthy of government bonds z Enable investing by individuals z Set rate lower and offer partial profit participation instead z Rupee bonds (attractive fundamentals)
Set up investment trusts for private investors from Japan to broaden funding to encompass individual and institutional investors z Handle rupee-denominated bonds and currency exchange for Japan’s financial institutes z If rupee-handling is
2
Warrant bonds for infrastructure building
IIC issues warrant bonds in financial markets in EU z Separate the bond portion from the subscription rights (profit participation) z As same function as rupee government bond by government-guaranteed bond portion z Cash flow from built infrastructure returned as dividend payouts. Investors can choose between bonds and profit-participation portions. z Handle rupee-denominated bonds and currency exchange for Japan’s financial institutes z If rupee-handling is restricted, do all transactions in yen
3 Securitized paper IIC issues bonds with ratings based on preferential performance z Denominated in rupee, dollar, euro, yen, etc. z high-risk equity portion are jointly invested by government and companies z Return cash flow from built infrastructure
Investors should benefit from infrastructure investment in accordance to risk tolerance z Handle rupee-denominated bonds and currency exchange for Japan’s financial institutes z If rupee-handling is restricted, do all transactions in yen
Japan-India Investment, Inc.
4
Preferred securities for infrastructure building
IIC issues non-voting preferred securities z Preferred securities similar in nature to stocks and with chance to reap profit from infrastructure investment z Will be desirable if redeemable (rupee-backed) and government guaranteed.
Issue depositary receipts of preferred securities on Tokyo Stock Exchange to procure yendenominated funds z Profits from infrastructure returned as yen to investors in preferred securities. z Procure funds from broad sources including individual and - 16 institutional investors,
APPENDIX Strategic Partnership between India and Japan Forging a new era of finance and economics in Asia Jan 2009 Japan-India Investment, Inc. Japan-India Investment, Inc.
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Appendix 1
Closing Gap with Taxes and Social Insurance Trend in Gini coefficient of income The Gini coefficient measures the inequality of income distribution. It takes a value of 0 to 1, where values closer to 0 indicate more equality.
Initial income
Income after redistributio n through taxation After redistribution through social security
Income after redistribution
“Initial income” is the total of income from employment, business, agriculture, dairy farming, property and work inside the home as well as .miscellaneous income and benefits privately received (remittances, corporate pensions, retirement benefits and life insurance money). “Income after redistribution through taxation” is initial income minus taxes (income tax, inhabitant tax, property tax (excluding business property taxes), as well as tax on cars and minicars (excluding commercial vehicles). “Income after redistribution through social security” is initial income plus medical cost and social security benefits minus social security expenses. “Income after redistribution” is (income after redistribution through social security) minus taxes. Income is per household. Source: Ministry of Health and Welfare “Income and Its Distribution Survey,” conducted every three years since 1972.
Japan-India Investment, Inc.
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Appendix 2
Post-Growth 1) National Assets and Fiscal Steering The 1980s
The 1990s and after
Industry
Japan’s industries on route to global industries. z Funding must also internationalize.
Post-bubble economic stagnation, but many companies step up their globalization efforts z Net external assets and foreign exchange reserves expand
Private
Steady asset management by people through their high propensity to save
National financial assets grow to reach \ 1500 trillion
Road-related tax revenues grew and all World Bank loans repaid in 1990 z Gas tax goes from \ 20 billion to 2 trillion
Huge fiscal deficit z Because scheme was not changed in postgrowth era
Fiscal
However, can’t put brake on development so issuing of construction bonds and other government bonds mushrooms.
The Thefailure failureofofgovernance governanceininthe the1980s 1980sled ledtotogrowth growthininfiscal fiscalspending, spending,but but industry and private economy are excellent and society is stable. industry and private economy are excellent and society is stable. zz Ample Amplemoney moneyare aresearching searchingfor forinvestment investmenttargets targets Japan-India Investment, Inc.
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Appendix 3
Post-Growth 2) Financial Era The 1980s
The 1990s and after
Finance
Financial liberalization z Want to change from loan financing to business in international capital markets z Foreign exchange, warrants, CBs, derivatives, etc.
Secondary financial big bang z Financial market opens to foreign capital (non-performing loans, corporate revitalization, investment management) z Policy of ultra-low interest rates
Internation al
US fiscal deficit balloons, becomes debtor nation z Japan and Germany possess huge amounts of US government bonds z With change in tax system, funds flow into US
The rise of China z China becomes major holder of US government bonds z Faces risks to resource and environment
Globalization of financial markets (after 1985) z US domestic market, Euro, German, Swiss, Japan domestic markets become global
Growth Growthofofmanufacturing manufacturingand andservice servicesectors sectorsand andforeign foreignreserves reservesbring bringstrong strongpressure pressure on financial system to open. on financial system to open. zz Japan Japanhas hasexperience experiencetaking takingsteps stepstotoopen openmarket marketwith witheye eyeon oninternational international markets and domestic climate markets and domestic climate Japan-India Investment, Inc.
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Appendix 4
China’s Growth – Chance and Paradoxes China
Employment Capital Growth
↑ ↑ ↑
Direct investments / factory relocationsInitial
Exports Surplus
State-owned companies↓ Non-performing loans↓ Share prices ↓ Disparities ↑ Corruption ↑ Political tensions ↑
U.S.
Trade balance
Deficit
Foreign reserves & securities investments (mainly US bonds)
employment ↓ Corporate earnings ↑ Share prices ↑
Securities, property Pensions investing & speculation Currency peg, huge impact of US$ Interest rates
& assets ↑ Consumption ↑
Employment Resources Resources & & environment environment are are bottlenecks bottlenecks Real estate z z US$ US$ rates, rates, rising rising oil oil prices prices are are risk risk factors factors Japan-India Investment, Inc.
↑ ↑
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Proposal 1
Given Current System, Investment Trust is Realistic Current Situation Currency exchange of rupee is not being conducted in Japan. z Rupee-denominated savings and even taking the rupee out of India is not possible. Investing through funds is the only way for Japanese individual investors to access India’s securities markets z India fund became very popular; have surpassed China funds to reach \900 billion z Only institutional investors can trade rupee-denominated India government bonds in India’s markets. z India has not issued dollardenominated government bonds. Japanese investors have a huge appetite for non-Japanese bonds. z The outstanding balance of the Global Sovereign Open fund exceeded \5 trillion (in December 2005)
Proposed Schemes for Eliciting Investments from Japan Yen-denominated investment trust funds is realistic? z Convert to rupees via fund z Corporate bonds, CBs, warrant bonds and shares issued by Infrastructure Investment company z Target return of 5% plus project revenues. Monthly distributions, etc. z Joint investments with investors in India. Reasoning: 1. Realistic within current system. z Currency exchange via fund z Need it be registered in Mauritius? 2. Japanese investors have a huge appetite for foreign bonds z Not stable if only of stocks. z Interest rate differential with Japan 3. Ensure access by jointly investing with Indian investors Japan-India Investment, Inc.
Items Requiring Study 1. The possibility of issuing purpose-specific Indian government bonds. 2. The investment portfolios of India’s domestic investors. 3. Readiness for time when rupee becomes a key currency. 4. The possibility of reduced regulations on foreign investment in specific industries. 5. Depositary Receipts in TSE. Infrastructure Investment Company (IIC) issues DRs on TSE to procure yen z IIC guaranteed by government. z Preferred stock for higher dividend rate Æ Creates same result as a yen-denominated Indian government bond z If TSE proves difficult, issue dollar- and euro-denominated - 22 paper on Euromarkets.
Proposal 2
2
2 Promote Bilateral Investing in Private Sector
India’s leading companies list on Japan’s stock market to procure funds z Easier for Japanese individual investors to invest in companies of India Japan’s established technologies and brands facilitate strategic partnerships and M&As between companies in India and Japanese companies, whose growth has slowed amid a shrinking domestic market. z Expected to improve access to markets of India and world using India’s personnel and markets Japan-India Investment, Inc.
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Proposal 3
3
3 Build Social Infrastructure
Build social infrastructure z Pension z Healthcare z Life insurance z Savings
Essential to stable economic growth 1. Income redistribution enhances all 2. Amassing of individual financial assets 3. Source of funds for “hard” infrastructure 4. Expand financial, stock and bond markets as services to manage assets increase.
Experience-based advice from Japan and joint research will be beneficial z Universal care realized in field of social security. World's highest longevity rate, and little social disparity. z Experience with financial system using social security and private savings for “hard” infrastructure, helping ensure social stability and long-term economic growth. z Also experience with the limited fiscal management. Japan-India Investment, Inc.
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Proposal 4
4
4 Financial Reform and Globalization Financial reform
Globalization
1. Develop government bonds market z Phase out bank’s forced savings z At same time, enhance social security and divert funds to government bonds z Boost productivity of banking sector and expand credit
1.
Turn rupee into international currency and begin offshore trading z With direct foreign investments and balance of external payments, turn India into a capital surplus country z Need for international fund recycling
2. Reform, privatize and liberalize financial services. z Reform and privatize state-owned firms including banks, securities firms and insurance firms z Entry of private and foreign companies z Entry of Japanese financial institutions into India (essential step for entry of other Japanese firms)
2. Strategic planning for globalization z India needs strategy to face pressure like Japan faced to open its financial markets and to respond to calls regarding domestic situation and economic expansion
Experience-based advice from Japan and joint research will be beneficial in this regard, too. Japan-India Investment, Inc.
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