China plus one: India better placed than Asian peers for Japanese FDI, says Deloitte Japan chief executive

India has emerged as a major investment hub for Japanese businesses exploring a ‘China-plus’ supply chain strategy, Kenichi Kimura, chief executive officer of Deloitte Japan, said in an interview highlighting the steep increase in Japanese FDI into India in recent years.

Kimura, who was on a visit to India, said in an interview in the capital on Friday that India has the advantage of a big domestic market, which some of the other emerging Asian economies do not have. In addition, India also acts as a gateway for Japanese factories to export to the Middle East and Africa, which puts India in a sweet spot.

Figures speak volumes about the realignment of investment taking place in Asia. Data available from Japan’s finance ministry showed India received 706.9 billion Japanese yen or over $5 billion in FDI from Japan in 2023, overtaking Japan’s FDI into China and Hong Kong in that year, which stood at nearly 502 billion yen or roughly $3.6 billion.

That was the first time India got ahead of China in receiving FDI from Japan. In 2022, China and Hong Kong together received 752 billion yen or $5.7 billion FDI, more than the over 539 billion yen or $4 billion India received, data from Japan’s finance ministry showed.

The trend looks promising. The Global Trade and Investment Report 2024, brought out by the Japan External Trade Organization (Jetro), a Japanese government-related trade and investment promotion body, showed, citing provisional figures, that in January-May 2024, India received $1.8 billion of FDI from Japan, more than the $1.68 billion China received and the $897 million that Vietnam received.

After the covid pandemic, Japanese companies have been actively exploring China-plus supply chain strategies, with India emerging as a key destination, said Kimura. Some companies are looking at India not just as a manufacturing hub but as a gateway to high-growth markets like the Middle East and Africa, he said.

Major draw

“The sheer scale of India’s domestic market is a major draw, but what makes India even more compelling is its well-established business and talent networks across these regions,” said Kimura, adding that India is seen as not just a market but a critical supply chain hub that can drive regional and global success.

India’s start-up ecosystem and the emphasis on emerging technologies are also playing a role in the rising Japanese FDI into India, said Deloitte South Asia chief executive officer Romal Shetty.

“Japanese investments in India are witnessing strong momentum. This reflects the growing confidence in India’s economic potential and investment-friendly environment. India’s appeal lies in its expanding domestic market, the world’s second-largest labour force, and a young population with an average age of 28 years,” said Shetty.

He said the Indian government’s strong push for manufacturing through Production-Linked Incentive (PLI) schemes, stable economic growth and robust capital markets further reinforce its position as a key investment destination.

“Also, India’s rapidly growing start-up ecosystem, with a strong focus on innovation and emerging technologies, is attracting Japanese businesses seeking collaboration and technological advancements. Coupled with a strengthening regulatory framework, India presents a dynamic and sustainable growth opportunity for long-term investors,” said Shetty.

Attracting FDI has been a priority for prime minister Narendra Modi, who last year told chief ministers that becoming a developed economy requires tangible goals, not mere aspirations. Federal policy think tank NITI Aayog led by Modi, is currently preparing an investment index to benchmark states on their attractiveness for capital. In the Union budget presented on 1 February, finance minister Nirmala Sitharaman announced an income tax cut for individuals, foregoing ₹1 trillion in direct tax revenue, in order to boost consumption demand and investments into the economy.

Queries emailed to the Embassy of Japan in India and to India’s finance ministry on Friday seeking comments for the story remained unanswered at the time of publishing.