November 22, 2016 4:00 pm JST

Modi scores infrastructure wins in Japan and the UK

YUJI KURONUMA, Nikkei staff writer

NEW DELHI -- Indian Prime Minister Narendra Modi scored two big wins November in his push to improve the country's infrastructure. One was a nuclear power deal with Japan, and the other was an agreement with the U.K. to jointly establish a fund for infrastructure investment.

These moves are a big step forward for India, where inadequate infrastructure is hampering economic growth.

"Thank you for your kind hospitality!" Modi said in Japanese at the close of a joint news conference with Japanese Prime Minister Shinzo Abe after their talks in Tokyo on Nov. 11. The nuclear cooperation deal was the biggest focus of the talks, and there is little doubt that Modi was expressing genuine gratitude when he tried his hand at Japanese.

The two leaders reached an informal agreement on the deal at their talks in New Delhi in December 2015, but it was Modi's continued efforts to win support for the idea that got both sides to ink the accord.

Nuclear gold rush

According to India's Ministry of Power, the country's electricity supply-demand gap shrank to an all-time low of 2% in 2015. Still, one in three people in rural areas still live without power. The Modi government is convinced that boosting the power-generation capacity, especially in the countryside, is crucial to strengthening its political power base. It aims to raise the capacity of the nation's nuclear plants more than tenfold to 63 gigawatts by 2032. Assuming that one reactor generates 1,400 megawatts on average, India would need to build more than 40 reactors in the next 16 years to achieve that goal.

Rural Indians and companies equipped with off-grid systems to deal with power outages were not the only ones cheering the nuclear deal. The U.S. and France, which signed similar pacts with India in 2008, also see opportunities.

U.S.-based Westinghouse and General Electric have nuclear power alliances with Japan's Toshiba and Hitachi, respectively, and France's Areva has a partnership with Japan's Mitsubishi Heavy Industries. By combining their technologies and establishing consortiums, each alliance can improve its odds of winning bids to build nuclear plants in India.

Japan was eager to sign the deal as soon as possible to expand opportunities for Japanese businesses. But there was a hitch: India possesses nuclear weapons but has not joined the global Nuclear Non-Proliferation Treaty. Japan, an NPT member and the only country that has experienced atomic bombings, is extremely wary of the possibility of transferring nuclear power technologies that could help India's nuclear weapons development. As such, Japan wanted India to include a clause in the deal stating that Japan would suspend technological cooperation if India carried out a nuclear test. India opposed the clause due to its tense relations with its nuclear-armed neighbor, Pakistan. Eventually, the two sides agreed to draw up a separate document on possible suspension of cooperation, but they have not clarified whether it is legally binding. For Modi, this was a big win.

The Indian leader scored another success even earlier, during his Nov. 7 talks with British Prime Minister Theresa May in New Delhi. He took advantage of Britain's decision to leave the European Union, aware of the concerns in the U.K. that the country's status as the key trade and investment gateway to Europe might be in jeopardy. Britain is eager to strengthen its ties with India and other Commonwealth nations in the run-up to Brexit, and May's visit to India was part of that effort. The two governments agreed to jointly establish a fund with seed money of 120 million pounds (roughly $150 million) each and seek private sector investment from London to finance Indian infrastructure projects.

It is estimated that India will need $1.5 trillion over the next 10 years to improve its infrastructure. The government has presented a plan to create the National Investment and Infrastructure Fund to finance projects for that initiative, but an executive of an Indian financial company said no tangible progress has been made on the plan.

Modi and May failed to find common ground on easing visa requirements for Indian IT engineers coming to the U.K. They also made zero progress on the possibility of starting negotiations on a bilateral free trade agreement. Despite these failures, the joint fund could become a gateway for investment in India, which May called "the world's fastest-growing major economy." By agreeing to launch the fund, Modi indicated that he will respect the City of London's status as a global financial hub. In return, he won Britain's cooperation in vitalizing the NIIF.

Moment of doubt

Modi's infrastructure diplomacy has not always enjoyed tailwinds. In fact, the nuclear deal with Japan nearly stalled this summer.

In September, the atmosphere in the Modi government was decidedly gloomier. "Modi has very low expectations and is not excited to meet Abe in Tokyo this year, as Japan has not fulfilled the terms of the agreement made by Abe [in 2015]. There have been no tangible results yet at all," a senior member of Rashtriya Swayamsevak Sangh, the Hindu nationalist organization that serves as the main support base for Modi's Bharatiya Janata Party, told the Nikkei Asian Review at the time. "Abe was supposed to present our civil nuclear deal to Japan's parliament by June 2016 toward its approval on the deal," he added. The 2015 agreement refers to the informal accord between Abe and Modi on nuclear cooperation.

The two leaders also agreed in December last year to try to make progress on India's first high-speed railway project. The 980 billion rupee ($14.5 billion) undertaking would link Mumbai and Ahmedabad using Japan's shinkansen bullet train technology. The RSS official said Modi bartered for the nuclear deal by agreeing to use shinkansen technology.

Modi and Abe met in September in Vientiane on the sidelines of meetings related to the Association of Southeast Asian Nations. In their talks, which ran longer than scheduled, Modi asked Abe to make progress in domestic arrangements for the nuclear deal by the time he visited Tokyo. According to a source, Abe replied that he would do his best despite various difficulties involved. It was this discussion that likely led to the preparation of the separate document on the possible suspension of cooperation.

The next step

China has eclipsed Japan as the key source of investment and loans in Asia in recent years. But India's ties with its northern neighbor have not been smooth. When Chinese President Xi Jinping visited India in September 2014, he pledged to invest $20 billion in India over a five-year period. Modi tried to raise the amount to $30 billion during his trip to Beijing in 2015, but China apparently would not budge. In the meantime, China promised Pakistan in the same year that it would finance approximately 90% of the $46 billion needed to build an economic corridor in the South Asian country.

Building more and better infrastructure is a must if India is to maintain high economic growth and create more jobs. Now that Modi has won crucial support from Japan and Britain, attention is now on whether he can gain similar backing from China and the incoming U.S. administration of Donald Trump.

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