The $23 Billion Gap: How India Lost Japan’s Capital

India’s Lost Momentum

In 2008, Japanese direct investment to India and ASEAN were nearly equal at $5.6 billion and $6.3 billion, respectively. While total FDI in India increased from 2008 to 2024, Japanese inflows were volatile and underperformed relative to ASEAN. In 2024, Japanese investment in ASEAN surged to $28.7 billion, more than five times the $5.3 billion invested in India (Japan External Trade Organization, 2025). The gap highlights how rapidly Japanese capital can shift toward business-friendly environments and how India’s policy frictions can undermine its market advantages.

Between 2008’s near parity and 2024’s disparity, India did not lose its share of Japanese capital to China, but to Southeast Asia.

The divergence in Japanese capital allocation stemmed partly from global disruptions such as the 2008 financial crisis and the COVID-19 pandemic, but primarily from India’s protectionist turn aimed at China amid rising security tensions. Throughout the 2010s, India introduced a range of non-tariff trade barriers, including anti-dumping investigations leading to duties on Chinese industrial inputs critical to Japanese supply chains, investment restrictions, and expanded technical standards for imported products.

Japan’s stagnant FDI into India reflects the unique vulnerabilities of Japanese firms to India’s trade restrictions targeting China. Unlike many international firms whose Indian operations focus on services or consumer goods, Japanese manufacturers produce complex, parts-intensive products reliant on Chinese inputs that local Indian suppliers can rarely provide.

Despite India’s efforts to reduce Chinese economic influence, its industrial ecosystem remained dependent on Chinese industrial components for scale, cost, and variety. Between 2007 and 2022, India’s industrial imports from China tripled, accelerating at twice the pace of imports from other nations as the country’s industrial growth outpaced its domestic supply capacity (Global Trade Research Initiative, 2025). The contradiction left Japanese manufacturers caught between India’s anti-China restrictions and their continued need for Chinese components, creating a climate of supply chain disruptions and regulatory uncertainty. Rather than emerging as a reliable investment alternative to China for Japanese capital, India has become a complicated one.

Rather than emerging as a reliable investment alternative to China for Japanese capital, India has become a complicated one.

From Convergence to Collateral Damage

Rising security tensions and global shifts away from China led India to implement restrictive measures targeting Chinese economic inputs and investments in the 2010s and early 2020s. India’s tariff increases were relatively modest in the period. Average applied tariffs rose modestly from 13-14% in the early 2010s to 15.9% by 2024. India’s tariff rates on Chinese industrial inputs between 2008 and 2024 also saw only modest increases (World Bank, 2025a; World Bank, 2025b). The key disruption to Japanese investment came from India’s surging use of non-tariff measures on Chinese imports and capital.

India’s 185 anti-dumping investigations into Chinese imports between 2014 and 2024 struck at the heart of Japanese manufacturing operations. The investigations are targeting steel, machinery, chemicals, and other critical manufacturing inputs, leading to duties that generated compliance costs and sourcing uncertainty (Directorate General of Trade Remedies [DGTR], 2025). The impact was stark: 76.4% of Japanese companies in India cited the ‘absence of suppliers that meet quality and technical capability requirements’ in 2024—over 24 percentage points higher than the ASEAN average of 52.2% (Japan External Trade Organization, 2024). India’s anti-dumping actions handed ASEAN the advantage of more reliable and efficient industrial ecosystems for Japanese manufacturers.

India compounded its operational challenges by layering on investment restrictions. In April 2020, the Indian government introduced Press Note 3, a regulation mandating cabinet-level approval for foreign investments originating from countries sharing a land border (Department for Promotion of Industry and Internal Trade, 2020). Over the four years that followed, authorities had approved only 124 proposals, rejected 201, and left more than 200 proposals stalled in bureaucratic limbo (Economic Times, 2024). Japanese firms with any Chinese equity stakes, joint ventures, or sourcing relationships were indirectly in Press Note 3’s crosshairs. Meanwhile, ASEAN countries were streamlining investment pathways and maintaining openness to foreign capital, a contrast that gave Japan an obvious choice.

In the competition for Japanese capital, India retains fundamental advantages over its regional competitors, but there is a narrowing window of opportunity to close ASEAN’s lead.

India also increased technical standards for foreign products entering its market. The Bureau of Indian Standards Act of 2016 enabled India to sharply increase mandatory certifications across sectors central to Japanese manufacturing, such as electronics, steel, and machinery (Government of India, 2016). Data collected in 2022 revealed that India had 4,618 coded non-tariff measures enforced by 38 different institutions, compared to Japan’s 1,278 measures across just 12 institutions (Sarmeen & Sundaram, 2022; Nabeshima & Obashi, 2022). While intended to promote quality and safety, India’s expanding standards system created compliance burdens that could make entering the Indian market unprofitable. When combined with sourcing disruptions and investment restrictions, the product scrutiny created a cumulative effect that pushed Japanese investors toward markets with smoother operations support, transparent processes, and regulatory predictability.

An Open, But Narrowing Window of Opportunity

Capitalizing on India’s strengths will require business-friendly reforms that ease regulatory processes, foster integrated manufacturing ecosystems, and strengthen institutional partnerships with Japan.

In the competition for Japanese capital, India retains fundamental advantages over its regional competitors, but there is a narrowing window of opportunity to close ASEAN’s lead. Capitalizing on India’s strengths will require business-friendly reforms that ease regulatory processes, foster integrated manufacturing ecosystems, and strengthen institutional partnerships with Japan. India’s next moves will determine whether it reclaims Japanese capital as a strategic pillar of Indo-Pacific growth, or allows ASEAN to consolidate its lead for good.

In Part Two, we examine a three-pillar strategy for turning the tide, focusing on policy predictability, operational support, and innovation diplomacy. Each will be key to restoring Japan’s confidence in India as a long-term investment partner.