As part of specific investment-related issues presented by Japan to the Indian government ahead of Prime Minister Modi’s visit, Tokyo has requested that the finance ministry ask the RBI to allow currency swap transactions for the Japan Bank for International Cooperation (JBIC).
This will help JBIC offer long-term low-interest rupee loans for projects not connected with the Delhi-Mumbai Industrial Corridor (DMIC), where it has 26% stake.
“There is huge demand for rupee-based loans in India and JBIC can offer dollar or Yen funds through a swap. However, RBI prohibits this. If such transactions are allowed, JBIC would be able to lend at much lower interest rates because of its high credit rating. ADB and IFC are already allowed to do such swaps without limitations,” an official source said.
India and Japan have an extant arrangement for swapping their local currencies against the US dollar (the size of the swap deal was expanded to $50 billion in January 2014 from $15 billion previously), primarily aimed at tackling any short-term liquidity problems. This is sort of an insurance facility that could help both countries deal with any balance of payments problems arising out of/leading to extreme volatility in exchange rates. The idea is the central banks of both countries can be approached by each other for dollars against payment of their local currencies.
The current proposal is that an Indian bank, with the consent of RBI, provide rupee to JBIC against yen or dollar payments which the latter would lend to Indian projects.
JBIC would bear the exchange rate risk. Over the past few weeks, Japanese ambassador Takeshi Yagi has met several top government officials including union commerce minister Nirmala Seetharaman, finance secretary Arvind Mayaram and principal secretary to the PM Nripendra Mishra, with a list of such requests.
The Japanese government hopes most of the issues can be addressed before PM Modi’s visit that had been planned for early-July, but has now got delayed because of the Budget session in the Parliament to around end-August or September.
The Japanese government has also asked for an exemption from MAT for Japanese pharmaceutical firm Eisai for its $50 mill R&D and manufacturing investment in an SEZ in Andhra Pradesh – the exemption had originally been given but suddenly revoked post-investment in 2011.
Additionally, Japan has also sought removal of withholding tax on income from sale of goods by companies based in Japan – Honda Motor and Mitsubishi are currently facing huge withholding tax demands from local authorities. Separately, a request has also been made for an RBI approval for Japanese bank Mizuho to set up a branch in Ahmedabad – in a visit to Japan in 2012, Modi, then chief minister of Gujarat had reportedly suggested that such a branch be set up.
Roudra Bhattacharya | The Financial Express