World Economy

Japan to Build India’s $15b Rail Link

Japan to Build India’s $15b Rail LinkJapan to Build India’s $15b Rail Link

India selected Japan to help build its first high-speed rail link in a coup for Prime Minister Shinzo Abe and a defeat for China, which also had bid for the signature project.

The $15 billion deal clinches three years of negotiations and reflects the deepening relationship between India and Japan stemming from the personal relationship between Prime Minister Narendra Modi and Abe. Shared investment objectives and a mutual apprehension about China’s expansionism are pushing the two nations closer together, Bloomberg reported.

The proposed 505-kilometer railway will link India’s financial capital of Mumbai with Ahmedabad, a major economic and industrial hub in Modi’s home state of Gujarat. Japan is offering about $12 billion of the 980 billion-rupee ($14.6 billion) cost, Modi said Saturday at a joint news conference with Abe in New Delhi. The 50-year loan will carry an interest rate of 0.1% and a 10-year grace period, according to a copy of the agreement.

The deal comes after Japan lost out to China on a $5 billion rail deal in Indonesia in October. Along with the rail agreement, Modi and Abe signed accords on nuclear energy cooperation and defense equipment and technology transfers.

  Chinese Push

The loan requires that a Japanese company or a Japanese-Indian joint venture be appointed as the primary contractor on the project. Components to be manufactured in India include rolling stock, equipment and machinery. The two nations also agreed to explore cooperation on other high-speed rail projects in India.

China was pushing hard for the Mumbai-Ahmedabad project after signing an agreement with Modi in May to cooperate on railways. For the Indonesian project, China Development Bank provided three quarters of the required $5.5 billion funding.

Ahead of the announcement, Chinese Foreign Ministry Spokeswoman Hua Chunying was asked if China might lose because its loans were too costly.

  Trade Imbalance

Despite losing the contract, China still dominates trade with both nations. Japan’s trade with India is about 5% of its commerce with China, and less than a quarter of India-China trade.

Yet Abe’s government has outpaced China in investment pledges to India, promising to funnel about 3.5 trillion yen ($29 billion) in infrastructure loans, financing and public and private investment into India–the most of any country except for the United Arab Emirates. Modi’s government has set up an office to promote investment from Japan, and the two leaders vowed last year to double direct investment in five years.

Abe announced that Japan will make 1.5 trillion yen in financing and export insurance available to Japanese companies seeking to enter the Indian market through the Japan Bank for International Cooperation and Nippon Export and Investment Insurance.

Japan is also set to provide 400 billion yen in official development assistance this financial year and another 200 billion yen in the following to support infrastructure projects in India, including roads in its northeast region, India Foreign Secretary S. Jaishankar said. One northeastern state, Arunachal Pradesh, is claimed by both India and China.