CEPA at 15: Why the India-Japan trade pact fell short—and what a refresh could change

Japanese Prime Minister Sanae Takaichi is visiting India from July 1 to July 3 and she is expected to discuss a major Comprehensive Economic Partnership Agreement (CEPA) modernisation. A CEPA is an expansive free trade deal that goes beyond traditional agreements. India and Japan signed CEPA 15 years ago in February 2011 and implemented in August 2011. With the CEPA completing 15 years this year, both sides are expected to evaluate the pact's flaws to and undertake structural overhaul. Here we look at why it has not worked till now and what an overhaul can achieve:

What is CEPA?

With respect to Japan, CEPA at 15 refers to the 15-year milestone since the India-Japan Comprehensive Economic Partnership Agreement officially took effect. While a standard FTA focuses on lowering or eliminating tariffs on goods, a CEPA integrates goods, services, investments, intellectual property rights, and regulatory cooperation to foster deep economic integration. CEPAs are strategic economic and foreign policy tools that help India deepen trade and investment ties with partner countries. CEPAs also expand scope of work for Indian professionals, IT workers and service providers by opening overseas markets.

Also Read: Why Japan PM Sanae Takaichi's India visit is strategically significant | WION Decodes

Why has it not worked?

Analysis of the India-Japan Comprehensive Economic Partnership Agreement proves that it is a textbook example of a trade agreement that has heavily underdelivered for India while vastly benefiting Japan. Despite eliminating tariffs on over 94 per cent of traded items, the pact has resulted in a massive trade imbalance. India's imports from Japan nearly doubled from $10.9 billion in FY21 to $21.43 billion, while India's exports increased marginally from $4.43 billion to just $6.04 billion.

Even though Japan eliminated import tariffs on paper, it heavily restricted actual market entry using stringent technical and regulatory standards. For example: Indian generic drugs and garments face slow, multi-year approval processes by Japanese regulators and a lot of agricultural Indian goods are blocked. For example, Japan banned premium Indian mango imports following minor procedural lapses. A core promise of the CEPA was the "Movement of Natural Persons"—allowing Indian IT professionals, nurses, and engineers easy visa access to work in Japan. However, strict Japanese language proficiency mandates and complex local certification requirements have blocked Indian service sector professionals from utilising this clause. Compared to this, India dropped its protective manufacturing and industrial tariffs down to zero, opening the floodgates for Japanese machinery, steel, and electronics to outcompete local items.

What has CEPA been able to achieve?

The CEPA led to massive capital inflows in India. Cumulative Japanese Foreign Direct Investment (FDI) into India reached USD 44.97 billion, making Japan India's 5th largest source of FDI. Top Japanese companies have been a household name in India's automobile, telecom, and chemical sectors. During high-level bilateral summits, Japan committed to a massive new target of 10 trillion JPY (~USD 68 billion) in private investment into India over the next decade.

Also Read: WION Decodes | What could be biggest takeaways from Japan PM Sanae Takaichi's first India visit?

What a refresh could change?

The meeting between Modi and Takaichi may enlist CEPA transition into a broader "Economic Security Framework." Cepa 2.0 would pivot the agreement from a flawed, goods-centric trade pact into a forward-looking economic security framework, with focus on security at a time when the world is dealing with wars and rise of China is making the scenario in Asia Pacific extremely crucial.

While Direct Yen-Rupee trade settlement is on cards, which would mean elimination of US dollar, benefitting both sides because bypassing of the USD would cut down significantly on foreign exchange conversion fees. A refresh would introduce Mutual Recognition Agreements (MRAs) so Indian generic drugs do not face years of bureaucratic delays by Japanese regulators. While the 2011 pact failed to move professionals smoothly, CEPA 2.0 focuses on easing language-proficiency mandates. A refresh would lower the strict local-value-addition percentage thresholds. This allows Indian factories to import specialised sub-components from other regions, assemble them, and still legally export the final product to Japan under duty-free rates.