Why is Japan funding 81% of Bullet Train Project with 0.1% interest? What do they gain from it? Replied by Prabhu Chintala through Quora

So Japan is offering us a soft loan of $15 billion to help build our high speed railway infrastructure. So what is the catch? Remember that there are no free lunches in this world. Japan is not our altruistic rich brother to help us build our home. It is a plain buisiness strategy and an effective sales pitch. Let us analyse the loan as to what it is, how is it going to be implemented and why?

What is the loan?

Japan offers us to give a soft loan of $15 billion at a rate of 0.5 percent interest**

** conditions apply

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.

(Pic from google)

Why was the loan offered?

• Economic perspective: Japan is the worlds third largest economy. Japan has a declining population rate and its youngsters are more focussed on their jobs and careers than on their personal relationships. So naturally the birth rates decline and their demography ages. The working population reduces and there is a stall in consumption and hence demand. The economy undergoes stagnation.
• The sovereign wealth fund i.e the excess money ( the savings and accumulated forex) of Japan is huge.

So consider a situation like this- A shop keeper selling high end goods has stagnant sales. He has accumulated profits over a period of time when the sales were booming. Now his sales are not growing rapidly as they used to as the people within the area are rich and all their needs are satisfied. So the shop keeper comes up with a plan to take a certain amount of money from his accumulated profits and give some to a middle class person as a cheap loan for his daughter's marriage provided he buys atleast 30% of the marriage requirements from his shop.So

 it is a win win situation. The middle class person gets a cheap loan than those available outside and the shopkeeper gets interest for his money albeit a small one and also increase his sales. Seeing this deal more persons may approach shopkeeper for simuliar deals.So

 in the end the shop keeper cleverly uses his idle money to gain goodwill, get interest and also increase his sales without loosing anything.

• So India gets money to build its high speed rail infra and Japanese companies are involved in supplying a substantive amount of equipment.

Geo-political situation:

• Taming the chinese dragon: The chinese have the largest high speed rail network in the planet. Their HSR system is cheaper than the Japanese shinkansen but the Japanese have more reliability on safety
• China has been awarded the feasibility study oppurtunity to study the HSR Network between Mumbai and Delhi
• So if there are two shopkeepers instead of one in the above analogy, then more competetion and more sweeter deals
• 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 the soft financing.
• Japan also views aggressive chinese investments overseas with suspicion as a tool for growing chinese dominance in the S.E.Asian region.
• Japan also views India as a reliable ally and a partner in checking the chinese dragon.

So the offering of the sweet deal is a mix of economic ingenuity and geo politics at play