Beyond China, beyond tariffs: India, Japan look to MSMEs to turn strategic ties into factory-floor partnerships

As India and Japan deepen economic cooperation amid rising geopolitical tensions and supply chain realignments, industry leaders say the next phase of the partnership will not be shaped by billion-dollar investment announcements alone, but by whether thousands of small manufacturers can become part of Japanese production networks.

Prime Minister Narendra Modi and his Japanese counterpart Sanae Takaichi on Thursday agreed to strengthen cooperation across energy, artificial intelligence (AI), critical minerals, and resilient supply chains, as both countries seek to reduce dependence on China and build trusted manufacturing partnerships.

While large Japanese companies are expected to continue driving investments, industry experts believe that the real test lies further down the value chain. They believe India’s micro, small, and medium enterprises (MSMEs), which form the backbone of the country's manufacturing ecosystem and supplier base, could emerge as the most practical bridge between strategic intent and factory-floor collaboration.


According to industry experts who spoke to The Economic Times Digital, the opportunity for MSMEs extends across sectors such as precision engineering, automotive components, electronics, industrial machinery, specialty chemicals, food processing, and textiles.

Notably, bilateral merchandise trade between India and Japan increased to about $27.5 billion in FY2025-26 from $25.2 billion in FY2024-25, although Japan continues to enjoy a significant trade surplus. India’s exports largely comprise petroleum products, organic chemicals, marine products, textiles, iron and steel, and engineering goods, while Japanese shipments to India are dominated by machinery, transport equipment, electrical and electronic machinery, iron and steel products, and high-value industrial equipment.


MSME-to-MSME collaboration
About 1,500 registered Japanese companies operate in India, as per the government, with thousands of downstream firms and vendors across automobiles, electronics, engineering, and industrial manufacturing.

For India, Japan is also among India’s largest long-term investors. Between April 2000 and March 2026, cumulative Japanese foreign direct investment (FDI) into India exceeded $45 billion, spanning automobiles, electronics, industrial machinery, logistics, and infrastructure, according to the government data.

The biggest untapped opportunity lies not in merely increasing Indian exports to Japan but in creating direct partnerships between small businesses in both countries, says Anil Bhardwaj, Secretary General of the Federation of Indian Micro and Small & Medium Enterprises (FISME). “The biggest untapped potential for collaboration between India and Japan lies in MSME-to-MSME cooperation. Not from the perspective of Indian MSMEs exporting to Japan, but through Japanese MSMEs entering technical collaborations with Indian MSMEs, sharing best manufacturing practices and setting up joint ventures.”

According to him, such collaborations could help Indian manufacturers leapfrog productivity by adopting Japanese manufacturing techniques while giving Japanese companies access to India’s rapidly expanding domestic market and a competitive production base for global exports.

The focus on MSMEs assumes significance, given the sector’s central role in India's economy. According to the Economic Survey 2025-26, India has more than 74.7 million MSMEs, employing over 328 million people. The sector contributes 31.1% to India’s gross domestic product (GDP), 35.4% to manufacturing output, and nearly 48.6% to the country’s exports, making it a critical driver of industrial growth and global supply-chain integration.



Beyond buyers and sellers
Industry officials believe the partnership also needs to move beyond conventional buyer-supplier relationships towards joint product development and technology-led manufacturing.

Gopal Agrawal, Chief Executive Officer at speciality chemicals manufacturer Anupam Rasayan India, says the India-Japan partnership presents an opportunity to reshape global speciality chemicals supply chains as companies diversify manufacturing beyond China.

“The next phase of the India-Japan partnership should move beyond traditional buyer-supplier relationships towards co-developing next-generation specialty and performance chemistries through joint R&D, technology transfer and long-term manufacturing partnerships,” Agrawal says.

According to him, sectors such as specialty chemicals, electronics, semiconductors, advanced materials, and pharmaceuticals offer significant headroom for collaboration. He says stronger policy alignment, faster regulatory harmonisation, and greater industry-to-industry engagement could help both countries build globally competitive manufacturing ecosystems while strengthening supply-chain resilience.

Experts highlight that Japanese manufacturers typically place equal emphasis on long-term supplier relationships, process discipline, quality consistency, and continuous improvement. They emphasise that for Indian MSMEs integrating into Japanese supply chains, therefore, require far more than competitive pricing, demanding sustained investments in quality systems, certification and manufacturing excellence.


Quality, compliance remain the real challenge
Even though India and Japan signed the Comprehensive Economic Partnership Agreement (CEPA) in 2011, experts highlight that tariff liberalisation has not automatically translated into stronger exports.

Nisha Taneja, Senior Visiting Professor at the Indian Council for Research on International Economic Relations (ICRIER), says although the agreement eliminated tariffs on nearly 95% of tariff lines for India, many exporters continue to struggle because they fail to meet Japan’s stringent quality and compliance requirements. “Japanese and Indian MSME joint ventures can help bridge this gap by facilitating technology transfer, the adoption of Japanese management practices, and improvements in production processes while enabling Indian firms to meet Japanese quality standards and certification requirements,” Taneja says.

In her view, such partnerships can also provide Indian companies with market intelligence, established distribution networks and greater credibility among Japanese buyers, while helping them better understand consumer preferences in Japan. Although collaborations have traditionally been concentrated in automobiles, she sees significant scope to expand into precision engineering, electronics, semiconductors, renewable energy equipment and even labour-intensive sectors, such as textiles and leather.

“While access to finance will remain a critical bottleneck for India’s MSMEs, addressing complementary challenges, such as technology upgrading, managerial capabilities, quality compliance, market access, and a better understanding of consumer preferences, is equally essential for enabling them to compete successfully in Japan and other advanced economies,” she says.



Building supplier ecosystems
Seiji Ota, Partner at Deloitte India, believes that Indian MSMEs could become the most practical vehicle for translating the growing strategic partnership between India and Japan into deeper industrial collaboration. According to him, the strongest opportunities lie in automotive components, precision engineering, industrial tooling, electronics sub-assemblies, specialty chemicals, and factory automation equipment, where Japanese manufacturers depend on highly specialised supplier ecosystems.

“The principal challenge is achieving the combination of cost competitiveness, near-zero defects, full traceability, process stability, and on-time delivery that Japanese manufacturers require to compete effectively while protecting the integrity of tightly integrated production systems,” Ota says.

According to him, supplier development programmes backed by joint ventures or equity participation tend to deliver the best outcomes by aligning incentives and encouraging long-term technology transfers. He also says Japanese companies should increasingly look beyond established manufacturing hubs, such as Delhi-NCR, Karnataka, Tamil Nadu, and Maharashtra, and integrate capable MSMEs in Tier II and Tier III industrial clusters into Japan-linked supply chains.

“Policy support should prioritise certification assistance, supplier matchmaking platforms and co-investment mechanisms to accelerate MSME integration into Japan-linked global manufacturing networks,” Ota says.


Looking beyond traditional export markets
Industry representatives also believe that Indian MSMEs need to rebalance their export strategy by paying greater attention to Asian markets.

Vikas Singh Chauhan, Director of the Home Textile Exporters Welfare Association (HEWA), highlights that Indian exporters continue to focus heavily on traditional destinations, such as the US and Europe, even though markets like Japan, South Korea, and Thailand remain significantly underpenetrated.

“Japanese consumers and businesses have a strong preference for Indian products, but our MSMEs are not adequately prepared for that market. We have traditionally focused on the US and Europe, while a much larger opportunity exists in Asia,” he says.

According to Chauhan, India’s exports to markets such as Japan, South Korea, and Thailand account for less than 2%, highlighting the untapped opportunity for export-oriented MSMEs. He says the bigger constraints are not financing but inadequate market understanding, limited R&D, and weak supply-chain capabilities. Many MSMEs continue to struggle to meet Japanese quality expectations and delivery timelines, while inconsistencies in raw material quality also affect export competitiveness.

“The government should facilitate study tours, buyer-seller meetings, and greater participation in trade exhibitions so that Indian and Japanese MSMEs can understand each other’s requirements. Joint ventures can also play an important role because they help Indian companies understand exactly what Japanese buyers are looking for,” Chauhan says.

FISME’s Bhardwaj says for now, the biggest challenge is creating institutional mechanisms that bring enterprises from both countries together. According to him, sustained engagement through business delegations, supplier matchmaking, joint ventures and technology partnerships will be critical to converting the strategic momentum generated by the leaders' meeting into long-term industrial collaboration.

“There is a huge distance between Indian and Japanese MSMEs that needs to be bridged to bring them together,” he says, advocating for identifying potential partners, developing trust and institutionalising cooperation by reducing risks to fully realise the potential of this partnership.