One of the most important reason is the competitively low interest rates but it is just the tip of the iceberg. As it is said, there’s nothing called free lunch and Japan does not do a favour to India by providing loans at negligible interest rates. People think it is India who approaches Japan for financing its Infrastructural projects, but most of the time it is the other way round.
Banks in Japan are flush with cash. Until 2018 they poured money into China but now China is flush with its own money and with introduction of new policies for boosting the country’s banking industry, it prefers to invest its own money.
Japan has had negative inflation rates in the recent years. They also have very low interest rates, as low to zero. What this means is that they have the money but very few investment opportunities within Japan. So, they want to invest the money in other countries so that they can get returns. Since Japan is a developed country, so they don't get high interest rates like India by keeping their money in banks. So, they are trying to invest their money in the form of international loans. Since there’s not much demand for domestic financing, it has turned out to be a necessity for Japan to finance international projects.
Also, the Japan International Cooperation Agency (JICA) gives loan for 0.5–2% p.a. and it is very feasible for India to take those Japanese money and use for our Infra projects. We can invest our money elsewhere which gives us high returns. Thus, it’s a win-win situation where both India and Japan benefits.
From the above chart it is clear that project financing through Japanese financial institutions is more feasible than from its Indian counterparts.
Japan is funding 81% of the Mumbai- Ahmedabad Bullet Train Project with 0.1% interest. So Japan is offering us a soft loan of $15 billion to help build our high speed railway infrastructure but there’s a catch. Remember that there are no free lunches in this world. It is a simple business strategy and an effective sales pitch.
Japan offers us to give a soft loan of $15 billion at a rate of 0.1 percent interest rate but here comes the catch. Japan has offered to meet 80% of Mumbai-Ahmedabad high speed train project cost provided India buys 30% of the equipment including coaches and locomotives from Japanese firms. Presently facing steep competition from low cost Chinese High-Speed Rail firms, this move would give a big boost to the Japanese manufacturing sector considering that it would be awarded contracts worth billions of dollars in the near future when the rail project will be constructed.
Why was the loan offered?
Economic perspective: Japan, the world’s third largest economy has a declining population rate and its youngsters are more focussed on their careers than on their personal relationships. So naturally the birth rate declines and their demography ages. The working population falls and there is a stall in consumption and hence demand. The economy undergoes stagnation. The resulting sovereign wealth fund i.e. the excess money (the accumulated forex and savings) of Japan is huge.
So consider a situation like this- A shop keeper selling high end goods has his sales stagnating. He has accumulated profits over a period of time when sales were booming. Now his sales are not growing rapidly as they used to as the people in the locality are rich and all their needs are satisfied. So the shop keeper comes up with an idea to take a particular amount of money from his accumulated profits and give some to a middle class person as a cheap loan for his marriage ceremony provided that he buys atleast 40% of the marriage requirements from his shop. This is a win win situation. The middle class person gets a cheap loan than those available in the market and the shopkeeper gets interest for his money albeit a small one and also increase his sales. Looking at this lucrative deal more persons may approach the said shopkeeper for similar deals. So in the end the shopkeeper cleverly uses his idle money to gain goodwill, get interest and also increase his sales without loosing anything.
Similarly, India gets the money required to build its high speed rail infra and Japanese companies are involved in supplying a substantial amount of equipment.
Geo-political perspective:
1) Taming the chinese dragon: China has the largest high speed rail network in the planet. Their HSR system is cheaper than the Japanese shinkansen but the Japanese system has more reliability on safety
2) China has been awarded the feasibility study of the HSR Network between Mumbai and Delhi. So if there are two shopkeepers instead of one in the above analogy, then more competition results and consequently sweeter deals for India
3) China has won the contract to build a HSR in Indonesia beating the Japanese. So Japan hopes that the Mumbai-Ahmedabad deal will be swung in its favour by its soft financing.
4) Japan also views aggressive chinese investments overseas with suspicion as a tool for growing chinese dominance in the S.E.Asian region and the financing of India’s bullet train project can be seen as a move to counter China’s dominance in this field.
The Japan International Cooperation Agency (JICA) is also funding various Metro rail projects in India :
Overall, it has extended concessional ODA loans worth over 1 trillion Japanese Yen (approximately INR 60,000 crore) for the development of metro systems in Delhi, Kolkata, Bengaluru, Ahmedabad, Mumbai and Chennai. These concessional loans were made available through the Japan International Cooperation Agency (JICA), at the interest rate ranging from 0.3% to 1.2% per annum with the repayment period ranging from 15 to 30 years including the grace period.
Things to keep in mind:
The loans provided are in JPY, so the interest is not just 0.5–2.0%, it will have inflation difference as well, which may be anything from 2–5%. if we compare India’s and Japan’s inflation rate, there is difference of like 2% and we are supposed to pay back in yen so total interest rate=whatever the bank gives+2%
Also, these loans are for specific projects which cannot be diverted for another project. More importantly, they have specific sourcing clauses as in requiring the project to use Japanese components. in other words, these JICA loans are to ensure demand for Japanese manufacturing, hence the low interest rates.
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