India-Japan Economic Partnership: Strategic Convergence, Sectoral Opportunities

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Historical Relationship and Economic Collaboration

India and Japan share one of Asia’s most enduring and philosophically grounded bilateral partnerships.

Rooted in Buddhist cultural ties and a shared commitment to democracy, the rule of law, and an open international order, the relationship has evolved from a development-assistance dynamic into a full-spectrum “Special Strategic and Global Partnership”- a designation formalised in 2014 during Prime Minister Modi’s landmark visit to Tokyo.[1]

The “Japan and India Vision 2025”, which was a roadmap for deep, broad-based collaboration across sectors[2] has been supplemented by the ambitious “Japan-India Joint Vision for the Next Decade”, which encompasses increasing cooperation and collaboration in security, defence, clean energy, technology, space, and a landmark human resource exchange programme.[3]

In 2025, the two sides set a new target of Japanese Yen (“JPY” or “Yen”) 10 trillion of private investment from Japan into India over the next decade, surpassing the earlier JPY 5 trillion target of 2022.[4] This expansion signals an extraordinary vote of confidence and creates an immediate commercial pipeline for legal, financial, and advisory work. Latest policy developments further underscore the commitment of both countries to deepen investment linkages. Japan has proposed the establishment of a dedicated investment facilitation cell in India, aimed at supporting Japanese companies in navigating regulatory processes, addressing operational challenges and accelerating market entry.[5] Further, the India-Japan Comprehensive Economic Partnership Agreement, in force since August 2011, governs goods, services, investment, intellectual property, and movement of persons, as well as provides for tariff elimination.[6] Collectively, these changes are indicative of an emerging investment corridor, one that is not just backed by capital investment, but institutionalized, legal frameworks that are meant to turn will into a long-term, scalable commercial activity.

Infrastructure Financing and ODA

Japan remains India’s largest bilateral donor, having extended loans and grants since 1958. As of the latest available data, accumulated commitments exceed JPY 6.978 billion, with 84 ongoing projects across power, transportation, environment, and basic human-needs infrastructure.[7] In March 2025, the two governments signed six loan agreements worth JPY 191.736 billion, continuing a tradition of developmental financing that dates back over six decades.[8]

The flagship infrastructure initiative remains the Mumbai-Ahmedabad High-Speed Rail Corridor – India’s first bullet train project, largely funded through a Japan International Cooperation Agency (“JICA”) loan. Beyond the bullet train, Japan has financed over 750 kilometres of road infrastructure in India’s northeast[9], extended Official Development Assistance (“ODA”) loans for Delhi Metro Phase IV, and is pursuing smart islands and port digitalisation projects in the Andaman & Nicobar and Lakshadweep islands.[10]

Infrastructure projects financed through JICA and Japan Bank for International Cooperation (“JBIC”) carry specific procurement and contractual standards, including requirements around competitive bidding, environmental and social safeguard frameworks, and dispute resolution mechanisms often aligned with Japanese government procurement norms. Cross-border financing structures require careful navigation of India’s exchange control laws and External Commercial Borrowing (“ECB”) regulations, and sector-specific regulatory approvals. As projects progress to construction and operations phases, legal practitioners in project finance, engineering, procurement, and construction contracting, land acquisition, and arbitration will find growing opportunities.

Long-Term Joint Ventures

Japanese corporate presence in India has become substantial and structurally diversified. As of October 2024, 1,434 Japanese companies operate in India through 5,205 business establishments.^[11] Long-term JVs have been the dominant structural model. The Government of India has facilitated these arrangements through the “Japan Plus Desk” mechanism under the Department for Promotion of Industry and Internal Trade of India (“DPIIT”), a dedicated team with representatives from the Indian government and Japan’s Ministry of Economy, Trade and Industry (“METI”) tasked with investment facilitation, regulatory liaison, and promotion of Japanese Foreign Direct Investment (“FDI”).^[12]

The India–Japan Industrial Competitiveness Partnership (“IJICP”), anchored in a 2021 Memorandum of Cooperation (“MoC”) between DPIIT and METI, provides the institutional framework for identifying and removing structural barriers to joint manufacturing competitiveness.^[13] In terms of the legal landscape, long-term JV structures generate work across the lifecycle: shareholder agreements, technology licence and transfer agreements, operational frameworks, IP ownership and confidentiality, and eventual exit or restructuring.

Japanese FDI in India

Japan is India’s fifth-largest FDI source nation, with cumulative equity inflows of approximately United States Dollar (“USD”) 43.28 billion between April 2000 and December 2024 (representing approximately 6% of total cumulative FDI into India).[14] The JBIC’s 2024 survey ranked India as the top promising country over the medium term (next 3 years).[15] Japanese annual direct investment in India’s transportation sector alone increased more than sevenfold between 2021 and 2024, reaching nearly USD 1.91 billion, while simultaneously declining in China’s transport sector.[16]

Indian Investments in Japan

As of 2022, the number of Indian companies working in Japan is increasing, with the number of such companies crossing 100, and India’s net foreign direct investment in Japan standing at 1.798 million.[17] The corporate footprint of Indian firms in Japan includes some major firms like Tata Consultancy Services, Canara Bank, ShimBi Labs, Tech Mahindra and Cyient.[18]

Human Resource Exchange

People-to-people movement has long underpinned the bilateral commercial relationship. Japan’s JICA has sent 11,835 Japanese experts to India and trained 8,400 Indian professionals in Japan.[19] As of December 2024, approximately 53,974 Indian nationals reside in Japan, a community whose commercial importance in IT, engineering, and caregiving is growing rapidly.[20]

The transformative moment came in August 2025 with the Action Plan for India-Japan Human Resource Exchange and Cooperation, announced at the 2025 Annual Summit.[21] The plan sets an aspirational target of facilitating the two-way movement of more than 500,000 personnel within five years.

Japan and India also have a social security agreement, which eliminates double social security contributions for Indian workers in Japan, provided that the Indian worker is covered under the social security system of India and continues to pay his/her contribution during the period of overseas contract.[22] It will also enable them to repatriate or transfer their accrued social security benefits upon relocation to India or another jurisdiction.

Latest Economic Trends

Japan’s changing monetary policy

For decades, Japan’s monetary policy served as a primary engine for global “carry trades,” where investors borrowed Yen at negligible interest rates to invest in higher-yielding assets abroad. However, as of early 2026, the Bank of Japan has decisively moved toward raising interest rates to combat domestic inflation. For Indian entities, this shift signals a potential rise in the cost of capital. As the Yen strengthens, Indian investments into Japan become more expensive and Indian companies with Yen-denominated ECBs may face increased repayment burdens. However, the rising Yen and falling rupee can accelerate long-term FDI in India, which will support Japan’s goals to invest 10 trillion Yen into India over the next decade.[23]

Supply Chain Diversification: The “China +1” Strategy

The “China +1” strategy has evolved from a defensive trend into a strategic mandate for Japan and India. Japan is actively de-risking its manufacturing base by establishing supply channels with friendly countries and decreasing reliance on China. India is emerging as an important “Plus One” destination, specifically in semiconductors, pharmaceuticals, and critical minerals sectors. This transition is codified through G2G frameworks like the India-Japan Digital Partnership 2.0, which facilitates “friend-shoring” of moving critical production to politically aligned partners to avoid the logistical vulnerabilities of over-reliance on a single country.

Implications of the West Asia Conflict

As the West Asia conflict intensifies, countries all over the world face supply chain crunches and economic uncertainties, India and Japan are focused on enhancing collaboration in key sectors such as critical minerals, semiconductors and AI, with a central theme of de-risking their economies from supply chain reliance and geopolitical shock.[24]

Sectoral Analysis

It is in this context of growing economic convergence and changing world priorities that the India-Japan relationship is now being characterised by industry-specific cooperation. The relationship is no longer pegged on any single pillar like infrastructure or automobiles, but rather is playing out in a series of strategic areas that integrate capital, technology, policy support and long-term demand. At this stage, it is important to take a closer look at the major sectoral focus areas so as to know where the next stage of India-Japan interaction is going to culminate.

Automobiles and manufacturing

The most established and commercially entrenched pillar of the India-Japan economic relationship is the automobile and manufacturing industry. The total FDI equity inflow of Japan into India was USD 43.36 billion between January 2000 and December 2024, and the automobile industry was the largest recipient of Japanese FDI in India, 16.87% of the total.^[25] What distinguishes Japanese investment in this sector is not just scale, but structure. Japanese participation in India has historically been long-horizon, manufacturing-led and vendor-network driven. That model persists to date; however, it is changing. The Embassy of Japan in India and Japan External Trade Organization indicated that as of October 2024, there are 1,434 Japanese companies and 5,205 business establishments in India, and over half of all Japanese companies and more than one-third of their operational bases are in the manufacturing sector.^[26] This implies that the automotive relationship is part of a broader Japanese industrial presence, which encompasses components, machinery, and electrical equipment. The industry can thus not be viewed as a sole Original Equipment Manufacturer (“OEM”) narrative but as a whole manufacturing ecosystem with a huge bearing on supply contracts, localisation, industrial land, technology transfer and vendor compliance.

The institutional structure of this ecosystem has been getting more organised in recent years on a bilateral basis. The formal mechanism is the IJICP, based on the MoC between the DPIIT and the METI.[27] The partnership is aimed at improving the industrial competitiveness of India and increasing the industrial and R&D collaboration between India and Japan.

The current regulatory environment remains highly favourable to Japanese automotive and manufacturing investors. India’s FDI policy permits 100% foreign investment under the automatic route in manufacturing, and manufacturers are permitted to sell products manufactured in India through wholesale and/or retail, including e-commerce, without prior government approval.[28] This has been one of the central legal enablers for Japanese investment because it allows integrated manufacturing structures spanning production, distribution and exports.

India’s policy is now explicitly geared toward moving the India-Japan automotive partnership beyond conventional assembly into electric mobility, batteries and advanced components. The centrepiece is the Production Linked Incentive (“PLI”) Scheme for Automobile and Auto Components, with an outlay of INR 25,938 crore.[29] The scheme is designed to promote domestic manufacturing of advanced automotive technology products, including electric and hydrogen-based mobility technologies and high-value auto components. For Japanese investors, this is highly material: Japanese OEMs and suppliers are well-placed in exactly the technologies- precision components, EV systems, power electronics, fuel-efficiency technologies and high-quality manufacturing processes that the scheme is designed to incentivise. The policy picture is reinforced by adjacent schemes relevant to the EV manufacturing chain, like the PLI Scheme for Advanced Chemistry Cell Battery Storage[30] and PM E-DRIVE Scheme.[31]

Recent developments suggest that Japanese manufacturers continue to see India not only as a demand market, but increasingly as a production and export base. Suzuki’s latest announcement in March 2026 is a useful example: Maruti Suzuki approved an investment of INR 101.9 billion for the first phase of a new Gujarat plant with an annual capacity of 2,50,000 units.[32] Bilateral policy is also moving into mobility-tech cooperation: the 2025 India–Japan Economic Security Cooperation fact sheet records joint Vehicle-to-Everything demonstration experiments, annual technical workshops, and collaboration on intelligent transportation systems.[33] This indicates that the manufacturing relationship is beginning to merge with software, connectivity and smart-mobility regulation.

From a legal and business-development perspective, that is the real takeaway. The India–Japan automotive and manufacturing corridor is no longer confined to legacy OEM investment. It now sits at the intersection of industrial policy, localisation, EV and battery incentives, cross-border technology transfers, smart-mobility systems and supply-chain restructuring.

Critical Minerals

The critical minerals sector is emerging as one of the most strategically important, though still relatively early-stage, pillars of the India–Japan economic relationship. Unlike automobiles and manufacturing, where Japanese investment is already deep and measurable, the critical minerals partnership is presently being shaped more by strategic policy alignment and supply-chain security concerns. As per data, the metallurgical industries account for 6.49% of cumulative Japanese FDI into India from January 2000 to December 2024.[34] That figure is relevant, but it does not fully capture the scale or trajectory of the critical minerals partnership now under formation.

The strategic logic of cooperation is clear. Both India and Japan are seeking to reduce excessive dependence on concentrated overseas supply chains, particularly Chinese processing capacity for minerals that are essential to batteries, electric vehicles, semiconductors, clean energy equipment and defence manufacturing.[35] In this context, India and Japan are not merely pursuing a mining relationship; they are attempting to build a broader framework for ensuring resilient supply chains which are immune from Chinese dependencies.

In August 2025, India’s Ministry of Mines and Japan’s METI signed a MoC on Mineral Resources.[36] This is the most important recent bilateral instrument in the sector. The memorandum covers cooperation in exploration, mining, extraction, processing, recycling, stockpiling and supply-chain resilience, and expressly contemplates joint investments in India as well as other resource-rich countries. It also provides for the establishment of a joint working group, indicating an intention to move towards a more institutionalised partnership.

The most prominent example of India-Japan economic partnership in the critical minerals sector is the collaboration between Indian Rare Earths Limited and Toyota Tsusho, which led to the establishment of Toyotsu Rare Earths India in Andhra Pradesh, which has become a crucial supply chain node for critical minerals.[37] With the introduction of various schemes and measures, the emphasis of India-Japan partnership is slowly shifting from the export of raw or semi-processed mineral material toward the creation of a domestic “mines-to-magnets” ecosystem.

The regulatory environment has evolved significantly to support this transition. India’s FDI policy permits 100% foreign investment under the automatic route for mining and exploration of metal and non-metal ores, subject to sectoral laws.[38] At the same time, certain strategically sensitive minerals remain subject to tighter conditions, including cases where government approval, domestic value addition or technology transfer requirements may apply. A particularly important enabling reform came through the Mines and Minerals (Development and Regulation) Amendment Act, 2023, which removed several minerals from the list of “atomic minerals”, thereby opening them to private participation and auction-based allocation.[39] That reform substantially widened the pathway for foreign strategic investors, including Japanese participants, to enter upstream resource projects in India.

Government policy in this sector is being driven by the National Critical Mineral Mission (“NCMM”), approved in 2025 with an outlay of approximately INR 34,300 crore.[40] The mission is designed to support the full critical minerals value chain, including exploration, mining, beneficiation, processing, recycling, stockpiling and overseas asset acquisition. The NCMM is intended to streamline approvals, support value addition, and reduce strategic vulnerability in key minerals.

The critical minerals sector, therefore, represents a different stage of India–Japan economic cooperation from automobiles. It is less mature in terms of visible FDI, but more strategic in policy significance.

Nuclear energy

India has recently opened its nuclear energy sector to the private sector. The target is to increase India’s nuclear energy capacity tenfold to 100 gigawatts by 2047[41], which requires an estimated investment of USD 226 billion.[42] The government has passed a bill to overhaul the regulatory landscape for nuclear energy in India, allowing private companies to: (i) build, own, and operate nuclear plant or reactor; and (ii) fabricate, transport, trade, and store nuclear fuel.

India’s foreign investment policy continues to prohibit FDI in atomic energy. However, the government has clarified that there is no restriction on FDI in the nuclear industry for the manufacturing of equipment and providing other supplies for nuclear power plants and related facilities.[43]

Japan, a global leader in nuclear technology, is well placed to bolster India’s atomic energy sector. The potential for increasing collaboration and investment in the nuclear energy sector was highlighted by Prime Minister Narendra Modi in the India-Japan Economic Forum 2025.[44]

Further, the India-Japan Agreement for Cooperation in the Peaceful Uses of Nuclear Energy, which came into force in 2017, provides a legal framework for Japan to export nuclear technology, equipment, and materials to India, therefore facilitating deeper strategic and commercial engagement in this sector. India’s growing emphasis on the development of nuclear energy, together with cooperation agreements between India and Japan, positions the sector as a viable avenue for India-Japan collaboration.

Pharmaceuticals

The Pharmaceutical sector is a key growth sector for India and Japan. While India is one of the leading countries in mass manufacturing of drugs (3^rd largest producer of pharmaceuticals by volume and 13^th largest producer of pharmaceuticals by value[45]), Japan is a global hub for research and innovation in pharmaceuticals. This sector draws 4% of India’s total FDI.[46]

FDI in the pharmaceutical industry (including for the manufacturing of medical devices) is permitted up to 100% through the automatic route. For investment in brownfield projects, up to 74% is allowed through automatic route, after which government approval is required. Investment link conditions for this sector include: (i) prohibition of non-compete clause against promoters and existing shareholders; (ii) for brownfield investments, maintenance of the same production level of essential medicines and research and development expenses.

The Indian government has introduced PLI schemes in the pharmaceutical sector, which are aimed at promoting domestic manufacturing of critical bulk drugs such as Active Pharmaceutical Ingredients (“APIs”), Key Starting Materials (“KSMs”), and drug intermediates, particularly those where India has high import dependence (notably on China). The scheme also supports the production of high-value products, including complex generics, biopharmaceuticals, and patented drugs, through financial incentives tied to incremental sales. By targeting these segments, the Indian government is trying to reduce supply chain vulnerabilities and enhance technological capabilities in essential medicines.

These schemes align seamlessly with Japan and India’s China +1 strategy, with its focus on decreasing reliance on China for critical inputs like APIs and KSMs. India’s robust generic drug production, cost advantages, and government-backed incentives position it as an ideal “Plus One” destination for Japanese firms.

Semiconductors

India is aggressively positioning itself as a global semiconductor hub. The domestic semiconductor market, valued at approximately USD 52 billion in 2025, is projected to cross USD 100-110 billion by 2030.[47] To catalyse this, the Government of India launched the India Semiconductor Mission (“ISM”), which was expanded in the 2026 Budget as ISM 2.0 with an outlay of INR 10 billion.[48] This new phase pivots toward a comprehensive ecosystem approach, focusing on indigenous intellectual property (“IP”), semiconductor equipment, and speciality chemicals.

India’s FDI policy for this sector allows 100% investment through the automatic route. Under the ISM, the central government provides fiscal support of up to 50% of the project cost on a pari-passu basis for setting up semiconductor and display fabs.[49] Complementing central schemes, several Indian states such as Gujarat, Uttar Pradesh and Odisha have introduced dedicated semiconductor policies to provide top-up capital incentives. These schemes inter alia offer additional state subsidies, capital assistance and power supply guarantee.

Japan is a vital partner in this journey. In July 2023, India and Japan signed an MoC on the Semiconductor Supply Chain Partnership, focusing on design and manufacturing. This synergy was further emphasized in the India-Japan Digital Partnership 2.0 (2025), facilitating joint ventures like the Renesas-CG Power OSAT facility.[50] With access to India’s massive electronics market and state-backed fiscal subsidies, Japanese companies are well-positioned to lead the next wave of global semiconductor manufacturing from India.

Global Capability Centres

As of December 2025, the government reported that India has over 1700 Global Capability Centres (“GCCs”) and the sector is projected to grow to 2,400 GCCs and attract USD 105 billion investment by 2030.[51] These offshore units help multination companies in harnessing India’s skilled workforce and deploying it in key interest areas such as information technology, research and development, customer support, and other business operations.

For GCCs involved in sectors such as IT/ITeS, research and development and outsourcing activities, 100% foreign investment is allowed through the automatic route. Key central and state-level policies promote GCCs include: (i) the Software Technology Parks of India scheme which offers single-window clearances and various tax incentives; (ii) Karnataka’s GCC Policy 2024-2029 which provides land subsidies, power rebates, and innovation grants up to INR 5 million; and (iii) Gujarat’s GCC Policy 2025 which targets IFSC units with zero stamp duty and 100% electricity duty exemption for 10 years, various tax exemptions and seamless forex operations.

In the 2026 Budget, Finance Minister Nirmala Sitharaman proposed a national GCC framework to promote hubs in tier-2 cities[52] which may entail enhanced tax incentives. The government has implemented new labour codes designed to streamline regulatory compliance by removing duplicative requirements relating to registrations, returns, and maintenance of registers, which is expected to enhance the ease of doing business for GCCs.

Japanese entities can significantly cut costs through access to 28% of the global STEM workforce and 23% of global software engineering talent[53] at competitive salaries while maintaining proximity (1.5-hour time gap).

Artificial Intelligence

The AI segment of the India–Japan relationship is comparatively recent, and unlike manufacturing or infrastructure, it is not yet reflected in clearly disaggregated FDI data. Instead, AI-linked investments are captured within broader sectors such as computer software and hardware, services, telecom and digital infrastructure– areas in which Japan already has a visible presence in India’s FDI inflows.[54] The absence of clean data is not indicative of weak engagement; rather, it reflects the fact that AI is still emerging as a cross-sectoral layer over existing industries.

The India-Japan AI relationship is being driven by complementarity between India’s digital talent and Japan’s industrial and enterprise technology base, combined with a shared interest in developing trusted and secure digital ecosystems. The institutional foundation for this cooperation is the India-Japan Digital Partnership 2.0, formalised through a MoC in August 2025.[55] India and Japan have committed to developing safe, secure, and trustworthy AI systems that are human-centric and aligned with sustainable development goals. They will further intensify cooperation on the international level, including the Hiroshima AI Process, the UN, and AI Safety Summits, and enhance bilateral cooperation. The MoC is also concerned with the development of collaborative mechanisms of AI safety and security, such as constant monitoring, resilient protocols, and interoperable standards throughout the AI lifecycle.

The India-Japan AI Cooperation Initiative offers a more dedicated platform to collaborate in the field of large language models, joint research and academic-industry collaboration.[56] The significance of such developments is that AI is no longer an implicit part of IT cooperation but a bilateral priority with a formal engagement mechanism.

The Indian regulatory framework on AI is in the process of development, yet some of the foundational aspects have already been put in place. One of these projects is the India AI Mission, March 2024, with a budgetary allocation of INR 10,371.92 crore.[57] The mission seeks to establish a full AI ecosystem with public compute infrastructure, indigenous foundational models support, startup funding, datasets, and skilling and governance frameworks for safe and trusted AI. Simultaneously, AI operations in India are becoming more influenced by the larger digital regulatory system. Penetration into the AI industry in India is not so much about gaining production-related incentives as it is about positioning within the digital infrastructure, enterprise adoption, research partnership and platform development.

A unique aspect of the India-Japan AI relationship is the contribution of Indian IT and digital services companies based in Japan. Indian companies, including TCS, Infosys and HCL, have established a long-standing presence in Japan, which has helped them to transform themselves with the advent of digital engineering and IT modernisation.[58] Concurrently, bilateral policy actions, like the 2025 human resource exchange scheme, are anticipated to increase the influx of Indian digital talent into Japan, which strengthens AI collaboration by people, rather than capital.

Recent developments suggest that the AI partnership is moving from policy articulation to operationalisation. Formalisation of Digital Partnership 2.0, introduction of the AI Cooperation Initiative and the growth of data-centre and digital infrastructure investments all point to the idea that AI is becoming a fundamental component of India-Japan economic activity, not an adjunct layer of technology.[59] It is pertinent to note that India is still developing regulatory frameworks, and companies venturing into this area will have to negotiate a blend of data protection law, sector-specific regulations, and cross-border safety parameters.

Defence

The India-Japan defence relationship has developed to a more operational strategic alliance, which is a huge shift from usual diplomatic arrangements. What previously existed as dialogues and joint exercises is now extending into technology transfer, co-development and defence industrial cooperation, indicating a deeper convergence of security interests in the Indo-Pacific. Security engagement was established by the Joint Declaration on Security Cooperation (2008)[60], and since then, two key agreements were brought into effect in 2015: the Agreement Concerning the Transfer of Defence Equipment and Technology[61] and the Agreement on Security Measures for the Protection of Classified Military Information. These tools developed the legal foundation of technology transfer, co-development and safe information exchange. In 2021, this structure was reinforced by the Acquisition and Cross- Servicing Agreement, which allows both the Indian Armed Forces and the Japan Self-Defence Forces to provide logistical support to each other.[62]

Recent ministerial engagements have reinforced this trajectory. The India-Japan 2+2 Foreign and Defence Ministerial Dialogue (August 2024) acknowledged progress in joint research programmes, including collaboration on unmanned ground vehicles, and signalled a willingness to expand defence-industrial cooperation.[63] The most significant recent development is the move from dialogue to actual co-development and co-production of defence technology. This is exemplified by the Memorandum of Implementation signed in November 2024 for the co-development and co-production of the UNICORN (Unified Complex Radio Antenna) mast system for Indian naval platforms.[64] The agreement marks Japan’s first transfer of advanced defence equipment to India under the 2015 framework and represents a substantive shift from a buyer–seller relationship to a collaborative production model. The structure of the UNICORN arrangement is instructive from a legal and commercial standpoint. Japan provides design, engineering and core technology inputs, while India, through entities such as Bharat Electronics Limited, is responsible for integration and domestic manufacturing.[65] This reflects the alignment between Japanese technology capability and India’s “Make in India” defence manufacturing policy, which prioritises domestic value addition and local production.

Beyond specific projects, the regulatory and policy environment in India has evolved to support this model. The domestic industry has a chance to boost production in the sector with FDI in defence manufacturing being allowed up to 100% (up to 74% under the Automatic route and above 74% under the Government route).[66] The Defence Acquisition Procedure 2020 lays down categories of procurement that favour domestic manufacturing and an incrementally higher percentage of indigenous content. Complementing this, initiatives such as iDEX (Innovations for Defence Excellence) are designed to integrate startups and technology providers into the defence ecosystem, creating potential entry points for collaboration with foreign technology partners.[67]

In both commercial and legal aspects, the defence sector stands out from other fields of India-Japan economic activity. Transactions and activities are mostly government-driven, highly regulated, technology sensitive, and they need to be carefully negotiated in terms of industrial licensing, export controls, classified information procedures, technology-transfer controls, procurement eligibility and localisation demands. The move towards co-development and co-production also brings about additional complications in terms of ownership of intellectual property, allocation of liability, governance of a joint venture and long-term supply arrangements.

Foreign Investment Framework in India: Key Legal Considerations for Japanese Investors

As India-Japan economic engagement deepens across manufacturing, technology and strategic sectors, a clear understanding of India’s foreign investment regime becomes critical for structuring inbound investments. India’s FDI framework is largely liberalised, but remains rule-based and compliance-driven, requiring careful navigation of sectoral conditions, pricing norms and downstream investment restrictions.

India permits foreign investment under two primary routes:

Automatic Route – where no prior government approval is required;
Government Route – where approval must be obtained from the relevant ministry or department.

A significant majority of sectors, including manufacturing, services, infrastructure and technology, are open under the automatic route, making India one of the more accessible jurisdictions for foreign capital. This route now accounts for over 90% of total FDI inflows and covers the vast majority of sectors.[68] Several key sectors of interest to Japanese investors, including automobiles, auto-components, manufacturing and renewable energy, permit up to 100% foreign direct investment under the automatic route, subject to other applicable sectoral conditions.[69] However, certain sectors remain restricted or partially regulated, including defence, insurance, telecom, multi-brand retail and media, where caps and/or approval requirements apply. For Japanese investors, this distinction is important not only at the entry stage, but also for subsequent investments, restructuring and downstream investments, where sectoral caps and approval triggers must be continuously monitored.

Legal Framework for Foreign Investors

For Japanese companies and investors, India presents a well-structured, though layered foreign direct investment regime. The framework has been progressively liberalised over the past decade, and understanding its architecture is a prerequisite for any commercial engagement. Japan’s recent proposal to establish a dedicated investment facilitation cell in India is further expected to assist Japanese companies in navigating India’s regulatory landscape with greater ease and efficiency. This is part of a larger shift in the bilateral relationship which is now moving from investment promotion to active facilitation and institutional support, especially as Japanese investments become more sector diversified.

The legal edifice rests on two interconnected instruments. The primary statute is the Foreign Exchange Management Act, 1999 (“FEMA“), which governs all cross-border capital transactions. Beneath it, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (“NDI Rules“), notified by the Ministry of Finance, set out the permitted instruments, sectoral caps, pricing guidelines, and reporting obligations applicable to foreign investment. Alongside these, the RBI’s foreign investment directions and India’s FDI Policy lay out sector-by-sector eligibility, caps, and conditions.[70]

Investment Options- Choosing the Right Structure

The foreign investment policy in India allows non-resident entities to invest in India, subject to certain sector-specific restrictions and conditions. Investments can be made in Indian companies formed under the Companies Act, 2013, and Limited Liability Partnerships (LLPs) formed under the Limited Liability Partnership Act, 2008.[71]

Although LLPs can also be used as an investment vehicle, their application is limited because FDI in LLPs is permitted only in sectors where 100% FDI is allowed under the automatic route, and there are no FDI-linked performance conditions.[72] The same condition also governs downstream investment by LLPs with foreign investment and company–LLP conversions.[73]

Where a foreign investor establishes an Indian holding company or a joint venture that then invests in a second-level Indian operating entity, that second-level investment is classified as “downstream investment” under Rule 23 of the NDI Rules.[74] The guiding principle, recently reaffirmed by RBI’s updated Master Direction, is unambiguous: what cannot be done directly shall not be done indirectly. Downstream investments by foreign-owned or controlled companies must comply with the same entry routes, sectoral caps, pricing guidelines, and reporting obligations as direct FDI.[75]

In cases where the intended presence is more limited in scope, foreign entities may also establish branch offices, liaison offices or project offices under the foreign exchange framework. However, there are restrictions on their operations (liaison offices can only perform representational functions; branch offices can undertake approved commercial activities; and project offices can only undertake a specific project and generally cease to exist on completion of the project).

Pricing Guidelines

Indian exchange control laws require pricing guidelines to be followed while making inbound and outbound investments:

for inbound investments, the price of equity instruments must not be less than the fair market value (FMV) as determined by a chartered accountant, cost accountant, or a registered merchant banker using any internationally accepted pricing methodology. Conversely,
for outbound investments, the transaction must be conducted at an arm’s length price, per any internationally accepted pricing methodology.

Round Tripping

Round-tripping is generally prohibited in India as it may be sued for money laundering or tax evasion. Indian exchange control laws prohibit an Indian resident entity from investing in an overseas entity that directly or indirectly invests in India or has invested in India at the time of making such investment, which will result in a structure having more than two layers.

Future Pathways

The India-Japan relationship is shifting towards becoming a structurally compatible economic corridor, which is being shaped by the convergence of policies as much as commercial opportunity. What is different today is not the size of capital or sectoral dispersion, but the level of integration within manufacturing, technology, supply chains and talent. To India, Japanese involvement translates into long-term capital, technology and execution discipline; to Japan, India provides market size, a strong and low-cost labour pool and a plausible diversification platform in a global economy that is becoming fragmented. Meanwhile, the growing human resource exchange system, facilitated by the social security agreement, provides a parallel dimension of integration to connect capital flows with the permanent mobility of talent and skills between the two economies. The India-Japan alliance will not be characterised by the speed of deals in real time, but rather the stability and complexity of the ecosystem that it is focused on developing in the upcoming decades.

[1] https://www.mofa.go.jp/region/asia-paci/india/data.html

[2] https://www.mofa.go.jp/s_sa/sw/in/page3e_000432.html

[3] https://www.pib.gov.in/PressReleasePage.aspx?PRID=2161986&reg=3&lang=2

[4] https://www.pib.gov.in/PressReleasePage.aspx?PRID=2161986&reg=3&lang=2

[5] https://economictimes.indiatimes.com/news/economy/foreign-trade/japan-to-create-special-cell-to-push-fdi-into-india/articleshow/129933023.cms?from=mdr

[6] https://www.indembassy-tokyo.gov.in/eoityo_pages/NjA

[7] https://www.indembassy-tokyo.gov.in/eoityo_pages/NjQw

[8] https://www.pib.gov.in/PressReleasePage.aspx?PRID=2116250&reg=3&lang=2

[9] https://www.jica.go.jp/english/information/topics/2023/20231004_01.html

[10] https://www.pib.gov.in/PressReleasePage.aspx?PRID=2133323&reg=3&lang=2

[11] https://www.e-j.org.in/post/japan-s-strategic-investment-surge-in-india-a-new-era-of-economic-partnership-in-2025

[12] https://www.indembassy-tokyo.gov.in/public_files/assets/pdf/FifthWaveofIndiaJapanRelations.pdf