All entries for August 2005

August 30, 2005

Wrong About the Poor

The Telegraph, 30.08.2005

The article by Ashok Mitra was going well as long as it dwelt on the sufferings of Mumbaikars in the recent floods. But then he returned to his age-old rant against “foreigners”. It is a blatant fib to suggest that India has “hire and fire” labour laws. It takes numerous government permissions for a company in India to restructure if its workforce is larger than 100. The propensity of our trade unions to go on strike is what deters investors from entering India. It is not a coincidence that, as a UN report reveals, the world’s poorest countries have the most stringent labour regulations. Why the left and its cronies cannot comprehend this obvious fact baffles me.

Eastward Ho

The Telegraph, 26.08.2005

Stuck with years of communist baggage that turned West Bengal into an industrial wasteland, Buddhadeb Bhattacharjee has been systematically trying to open the state’s economy to private investment since 2000. In speeches after speeches to investors, domestic and international, he has been saying, “Bengal is open to all investors” and “the mistakes of the past will not be repeated”. He sang the same tune during his recent stopovers at Bangkok and Singapore, en route to Jakarta, where he hopes to entice the Salim Group of Industries to invest millions of dollars in the state. But he must have surprised even himself with his comment that foreign entities could own 100 per cent of the state’s ports and airports, instead of the usual 50 per cent cap on such investments. Even with a caveat — this arrangement will only extend to new projects — it is radical enough.

But the biggest obstacle to Bhattacharjee’s ambitions is the political atmosphere at home. One, there is the CPI politburo, which is extremely suspicious of his economic policies. And second, the political storm that is brewing in West Bengal, with opposition parties and coalition partners vociferously opposing the government’s moves to uproot peasants in order to provide land, especially for the Rs 5.1 billion special economic zone of the Salim group. Perhaps the storm will pass, with at least one party bigwig, Anil Biswas, favouring Bhattacharjee. Interestingly, Biswas has even advocated a shift, en masse, of occupation from agriculture to manufacturing/service industries — an argument long forwarded by economists and ignored by the cadre. Evidently, Bengal is looking down the barrel — it must reform to survive.

While change is visible in West Bengal, most notably in Calcutta, Bhattacharjee must know that international capital is a coward. It looks for the most generous host and the safest house — and the two strikes on August 24 by taxi drivers and students unions do not do anything to reassure them that the red flag of Marxism will not engulf their greenbacks in Bengal.

August 25, 2005

More FDI, Comrade?

Asia Times, 26.08.2005 and SAAG Paper 1518, 25.08.2005

"I must make a breakthrough with this," said Buddhadev Bhattacharjee, chief minister of India's West Bengal state, on Tuesday. On the face of it, this comment could have easily been attributed to yet another of his government's efforts to pacify the militant trade unions in the state. But surprisingly enough, this was Bhattacharjee in Bangkok, en route to his meeting with Singapore's Prime Minister Lee Hsien Loong in search of capital from the city-state.

Along the way, he met the Salem Group of Industries in Indonesia to encourage the mega-business group to invest in the state. At the Institute for South Asian Studies in Singapore, he pledged to be "unabashedly reformist", toeing the line set by Prime Minister

Manmohan Singh. Going one step further, the communist leader also made it clear that West Bengal "must reform or perish". After declaring that the country needs 100% FDI (foreign direct investment) in infrastructure, Bhattacharjee even invited foreign cash in stock markets. "We aren't looking for industrial finance only. We need FIIs (foreign institutional investors) to pump funds into our state," he told an FII meet at Singapore Wednesday. Back home, an impressed Manmohan Singh declared that all chief ministers should emulate Bhattacharjee's reform drive while the chief minister's communist colleagues squirmed at the new camaraderie between the comrade and the reformer.

Stuck with years of Soviet-style baggage that turned West Bengal into "an industrial wasteland" – according to the BBC - the state government under Bhattacharjee has been systematically trying to open up the state's economy to private investment since 2000. In speeches dotted with quotations from the great Bengali poet and Nobel laureate Rabindranath Tagore, he reiterated his central theme, that Bengal is open to all investors, and that mistakes of the past will not be repeated.

The reform-minded chief minister perhaps even surpassed himself with some of his comments. When asked whether his government would even consider an investment cap of 50% for infrastructure projects, he retorted that he had no objections to foreign entities owning even 100% of the state's ports and airports. There was a caveat though – this arrangement would only extend to the new projects, and not the existing ones. For example, the government is planning a second airport in Kolkata, West Bengal's capital, which would be open to foreign investors. But this in itself was a significant departure from the earlier myopic economic policies of the state government.

Bhattacharjee is hitting all the right notes in Singapore. He has had an extremely high-profile meeting with the Singaporean Prime Minister, with whom he signed two memoranda of understanding (MoUs) on health and education. He convinced Premier Loong and his wife Ho Ching to consider Bengal as an investment avenue and if need be, to visit the state and see the progress for themselves.

Ho Ching heads Temasek Holdings, the government's prime investment arm. A popular saying in Singaporean financial circles is that where Temasek goes, the rest of Singapore follows. Moreover, Temasek, along with the Government Investment Corporation, was adorned with special privileges during the Singapore-India Comprehensive Economic Cooperation Agreement unveiled on August 1. Bhattacharjee would be looking for Singaporean investment in a range of sectors, stretching from information technology to infrastructure development and food processing.

There are reasons to believe that Singapore may be looking at India as an attractive investment destination. In recent months, the economic ties between the countries have flowered well, with growing flights between the two, increasing trade, and cooperation in information technology. Singaporean investors have also faced disappointments in certain other markets, and many are yet to emerge from the dot-com fiasco in the US. Moreover, almost US$100 million may have been lost in the Suzhou Industrial Park in China's Jiangsu province, a major investment of the Southeast Asian city-state, and Singapore may well be looking to diversify its portfolio.

But the biggest deterrent to Bhattacharjee's dream of foreign investment flying to Bengal is the political atmosphere back home, and not international competitors. First, the politburo of his party – the Communist Party of India (Marxist) – is known to be extremely suspicious of his economic policies. Party heavyweights regularly attack Manmohan Singh's government at the center for its reforms zeal and have already blocked several major liberalization drives.

Second, a political storm is brewing in West Bengal itself, as opposition parties and coalition partners have become equally vociferous in their hostility to moves to woo foreign investors. Debabrata Bandopadhyay of the Revolutionary Socialist Party, a left coalition partner, recently declared, "We shall not allow multinationals to invest here, come what may." His rhetoric was aimed at the Rs5.1 billion (US$116 million) investment in a Special Economic Zone by the Salem Group. His party holds that the government is uprooting peasants in order to provide land for the companies in the economic zone.

For now, the storm has been smothered, at least enough for Bhattacharjee to save face at his foreign meetings. Anil Biswas, a party bigwig, has argued that "the government's efforts are in no way [a] deviation from the [ruling] Left Front government's poll manifesto of 2001". He also maintained that only mono-crop and infertile land is being transferred to investors. He even advocated an en masse shift of population from agriculture to manufacturing/service industries, for which the government is seeking investment. Ironically, such arguments have long been forwarded by economists, and long ignored by Bengal's cadres. The turnabout is proof that the state is looking down the barrel and realizes that it must reform to survive.

Bhattacharjee is sincere about his intentions, hopping from country to country for fresh sources of investment. He visited Italy and South Africa last year. Change is evident in West Bengal, most notably in Kolkata, as newly affluent middle classes adorn the shopping complexes and cinema halls of the city, where flyovers are mushrooming and roads beginning to look much better. However, finance capital is a coward. It looks for the greatest host and the safest house – and two strikes on Wednesday by taxi drivers and student unions did not do anything to reassure them that the red flag of Marxism will not gobble their greenbacks if they put them in Bengal. The chief minister keeps talking of learning from China, but try telling the cadres that!

Re: India irked by China oil deal

Asia Times Letters, 25.08.2005

The Chinese state media [are] mistaken in [their] conclusion of a "victory" over India in the PetroKazakhstan deal [India irked by China's gloating on PK deal, Aug 25]. India's ONGC [Oil & Natural Gas Corp] is not enmeshed in the state apparatus like CNPC [China National Petroleum Corp] – it is an autonomous navaratna public-sector company. In fact, some analysts have criticized the Petroleum Ministry in Delhi for not intervening to help out [ONGC] Videsh in its bid. Beijing on the other hand has showered its blessings on CNPC. However, that is not how it's done in India. Rules are rules, and they are kept. As a Petroleum Ministry spokesperson made clear, unless [ONGC] officially asked the ministry for some kind of lobbying, it would be impossible for them to intervene. In any case, their jurisdiction is limited.

August 23, 2005

The Bull Run Will Continue

SAAG Paper 1515, 23.08.2005

The ‘feel good’ factor in the Indian economy is back. Just a year or so ago, the National Democratic Alliance had to pay heavily in the elections for supposedly overdoing its ‘India Shining’ campaign on precisely this factor. Now, as inflation falls, agricultural output picks up, foreign investors zoom in and growth estimates are revised upwards, the shine seems to be back on the Indian economy. And this time it seems to be sustainable.

On his first trip to India, World Bank President Paul Wolfowitz said in the information technology hub of Hyderabad on 17th August, "'India is rapidly emerging as a country of global importance and we are seeing its footprints across the world now in new and exciting ways. I am here to learn from your model of development and reform in a democratic environment." Perhaps his comments should be seen within the context of recently improved US-Indian relations, but he was not really overstating his point.

Inflation, a big time worry for the government in a largely price elastic economy, is under control. On the week ending August 6, the wholesale price index fell to a two-and-a-half year low of 3.35% vis-à-vis the previous week’s 3.84%. This may seem surprising given the soaring prices of commodities like steel, and the global crude prices nearing $70/barrel. Yet, as the Finance Minister Palanippan Chidambaram said on August 20, much of the credit should go to the Reserve Bank of India’s "adroit management of money supply".

While the RBI foresees no change in interest rates in the medium term, a main reason behind the dipping inflation rate is the phenomenal monsoon. While citizens of Mumbai got an overdose of the rampant rains, in a country where 25% of the GDP is based on agriculture and where it employs over 600 million people, a good monsoon is bound to have a positive impact on growth. It is to be remembered that the 8.2% growth India achieved in 2003–04 was primarily because of a good monsoon following a severe drought in 2001–02 that led to a rocketing of agricultural output. While the 4% agricultural growth achieved in 03–04 might not be repeated, even a 2% agricultural growth will push the overall growth rate well past 7%.

Add to that the near 10% growth in services and manufacturing, the former accounting for over 50% of India’s GDP, greater than expected growth in foreign trade, increases in tax revenue owing to the nationwide value-added tax introduced in April, and soaring sectors like steel, automobiles, real estate and telecommunications- you can easily paint a rosy picture. Yet, roadblocks have emerged in the recent weeks which threaten to derail all this progress.

First, the blatant opposition of the US to the Iran-India gas pipeline is likely to delay or even stop the proposed $4 billion project. On her visit to Delhi in March, Secretary of State Condolezza Rice explicitly stated the American position- "I think that our views concerning Iran are very well known at this time. And we have communicated to the Indian government our concerns about gas pipeline cooperation between Iran and India. I think our ambassador has made statements in that regard." That is a poorly veiled ‘no’. For a country which imports 70% of its energy, this is a second blow after recent bombings in Bangladesh entailed that a natural gas pipeline via that country between India and Myanmar also seems unfeasible for a while. Despite Indian bureaucrats in South Block putting up a defiant face, it is of no mean significance that talk of the pipeline was quietly avoided during Prime Minister Manmohan Singh’s address to the nation from the Red Fort on Independence Day (August 15).

The consolation is that India’s energy companies are making new discoveries at a fair pace, and the state-owned companies have been spending around $1 billion annually to increase their stakes in foreign owned oilfields/companies. For example, Oil & Natural Gas Corporation (ONGC) has increased its tally of stakes to 16 during this fiscal year. Moreover, ONGC reported a new offshore oil discover in the Cambay Basin, along with coal bed methane gas finding in Jharkhand this week, taking its tally of discoveries this fiscal to 6. The private sector is not behind either. Earlier this month Reliance Industry struck methane gas in Madhya Pradesh, estimated to be around 3.6 trillion cubic metres.

Second, owing to continuous arm-twisting from the left parties, the Finance Minister this week ruled out "strategic sales" in profit-making state owned companies. Basic economics questions could be asked of this move. Who would buy "strategic stakes" in loss-making companies and why? Although the government has not ruled selling "small chunks" of shares in these companies, who decides what these chunks are? Most certainly the decision will lie with a bureaucrat-laden committee and not the boards of these companies. One of the main reasons behind the oversubscribing of the listing of these companies on the stock market was the expectation on investors’ part that eventually these companies will function autonomously under an independent board of directors accountable to the shareholders. That may well be a pipe dream now.

However, here too remains a ‘but’. While the media in India was vigorously debating the pros and cons of the alleged scrapping of the disinvestments process, reading between the lines, nothing of that sort has happened. Even Sitaram Yechuri, a Communist Party of India (Marxist) politburo member, recognised that the government has not changed its fundamental position- that sale of shares in profit making companies will continue, albeit the government retaining the controlling shares. Moreover, the government has re-iterated that all sales of shares will be through the markets, and not by private bidding. That may well lead to an improved accountability which may prevent debacles such as the one at the Dabhol power plant in Maharashtra. Finally, the government introduced certain new freedoms for public sector companies, which will enable some of them to freely acquire other companies worth up to $250 million. This is not a policy in vacuum- since last year the Finance Ministry has been consistent in gradually deregulating these companies. Thus, it could be argued that these companies will be de facto free and can be run efficiently. Evidently the markets think so- ONGC shares were up by 5.3% between August 16 and 19.

Third, the introduction of a dose of populism in the otherwise decent economic policy of the government has resulted in certain mind bogglingly grandeur monolithic policies. The mother of all such policies- The Employment Guarantee Act- was tabled in parliament on August 19. It pledges to give one member of a family below poverty line guaranteed employment for 100 days in a year. Typically, it raises more questions than it answers. Why exclude families just above the line? What is to be done about the rampant corruption in the state distribution system that is certain to gobble up a chunk of the massive amounts needed to fund this project? Where will such a huge investment (estimated at around Rs. 1.5 trillion) come from when the government is already struggling to meet the targets of the Fiscal Responsibility & Budgetary Management Act, 2003? Who decides the use of these public projects that would be erected to give jobs to these workers? Would it not be better to develop the rural infrastructure and provide support in the form of better quality seeds and encourage mechanisation of agriculture while letting the private sector give employment in other sectors? Would the policy result in speculation among shopkeepers about the increase in the people’s incomes and lead to a hike in local prices? The list could go on.

But for a few important reasons, this stops short of a financial disaster. First, it is only being introduced in 200 districts with a sketchy pledge of extending it to 350 districts in the future. Second, as economist Jean Dreze pointed out, there is no compulsion in the Common Minimum Programme to implement this project within a set time frame, nor is there an obligation to pay the minimum wage. Third, there is a clause in the bill which mentions that if the government is prima facie satisfied of a major corruption scandal in the scheme, it retains the right to block further funds being released. Unlike what the Marxists are seeking, there will be no "universal, unlimited and irreversible guarantee". That should be a sigh of relief for those who do not preach economics for the insane.

Despite all these hurdles, India will continue to "grow at roaring rates", to quote The Economist. That is because the macro-economic fundamentals of the country remain strong. In a rare stint of "crystal ball glazing", a senior official at the Securities & Exchange Board of India (SEBI)- the market regulator- predicted that the Sensex might cross 16,000 by the end of the 2005–06 financial year in March. That may be an overstatement, but the bull run on the stock market shows no sign of tiring, despite soaring crude prices and the recent floods in Mumbai, as it is beats its own recently set records by closing in on the magical 8,000 figure. While equities were doing well anyway, the recent comment by M Damodaran, Chairman of SEBI, advising investors to take "informed decisions", might lead to a run for mutual funds. According to Abeek Barua of ABN Amro, the current bull run is not just because of soaring corporate profit margins. The adrenalin rush in the market will continue because of a growing liquidity in the world market that is seeking returns, and given the uncertain nature of the current US growth, and a slowing European economy, India is a prime destination.

India needs better governance to raise its sustainable growth rate from 7% to 8–9%. And India expects better governance. Further tax cuts, removal of tax exemptions, more investment in infrastructure, reduction in duties and regulations to business and poverty alleviation programmes are planned in the next budget. It could be said that India’s reforms have been slow because it seeks to preserve its "human face". Yet, as Professor Jagdish Bhagwati of Columbia University has argued, the entire concept of human face could well be a mirage. India always had a human face, and continues to possess one, despite carrying on with economic reforms.

At a pace slower than expected, but still good, India will chug along. Perhaps that is better than flying high without scrutiny, and invariably running headlong into a myriad of problems, and then worry about "cooling down" or a "safe landing".

August 19, 2005

Terror Comes Home to Bangladesh

Asia Times, 20.08.2005

Terror returned to Bangladesh with 459 coordinated bomb blasts within a space of 30 minutes that rocked 63 of the country's 64 districts at midday on August 17. Prime Minister Khaleda Zia described it as a "heinous, cowardly, conspirational and well-planned act of terrorism", and the government launched a "massive manhunt" for the perpetrators. So far 90 people have been arrested for questioning in relation to the attacks that left two people dead and nearly 125 injured. Yet the attack should not come as a surprise for the administration.

Immediately after the blasts, Bangladesh's most powerful neighbor – India – expressed "grave concern". Delhi had long insisted that Dhaka take action against the seething Islamic fundamentalism that was brewing there, and had long been ignored. Now the people in one of the world's poorest countries are paying for such negligence on the part of their leaders.

According to many analysts, the attacks bore the hallmark of an al-Qaeda operation. That has not been established yet, but leaflets in the bombed areas were found, issuing a call for jihad until an Islamic state with Sharia law is established in Bangladesh. The banned organization Jamaet-ul-Mujahideen was blamed for the acts of terror; it promptly denied having anything to do with them.

Perhaps tellingly, just a day before the attacks rocked Bangladesh, Ananda Bazaar Patrika, a Bengali newspaper published from Kolkata in India, reported on a leaflet written in Urdu that was being distributed in Muslim-inhabited blocks of the city asking civilians to raise money for a company titled "Al-Qaeda International Limited". The police have arrested two Bangladeshi nationals in the city in connection with this. The headquarters of this supposed company was Dhaka.

India has long accused Bangladesh of negligence in stopping Islamic terrorist organizations from going into its border regions. It suspects that a lot of Indian separatist organizations receive funding and ammunition from Bangladesh-based outfits. The Jamaet-ul-Mujahideen and another group – Jagrata Muslim Janata Bangladesh – were banned in February. The ban on the former came nearly two years after the Dinajpur blasts in northern Bangladesh in 2003, in which it was also suspected to be involved.

The recent attacks have proven that the earlier ones were merely the tip of an iceberg. In any case, simply banning a group is easy, implementing the ban in far-flung rural districts is difficult, especially for Bangladesh, the world's most corrupt country, according to the latest Transparency International report.

Moreover, many observers accuse Jamait-e-Islami, a mainstream political party that is a member of the ruling coalition government, of actively supporting such groups. Investors, especially foreign, already think twice before putting their money in the country, and such direct political involvement in mass acts of terror would surely scare them away. Aftabul Islam, president of the American Chamber of Commerce in Bangladesh, said, "So far we have been saying there are no … Islamist extremists [in Bangladesh], but now we cannot hide the reality."

Bangladesh has been unstable for a while. As Chinese leader Mao Zedong remarked once, "It only takes a spark to start a prairie fire." Worse yet, this instability has spillover effects across the border in India. As a Ministry for External Affairs spokesman in Delhi said, "A stable, prosperous, secular and democratic Bangladesh is … in the … interest of … India."

First, reservations about security conditions in Bangladesh have dogged the proposed $4 billion gas pipeline between India and Myanmar. According to latest estimates, nearly 30% of Bangladesh's youth are unemployed. At least some would get employment in construction projects for this pipeline, not to mention the benefits to the economy of the transit fees India would pay to Dhaka for shipping nearly $40 billion worth of gas from Myanmar.

Second, a massive narcotic contraband nexus has reportedly been formed to finance many of the terrorist activities in eastern and northeastern India, not to mention within Bangladesh itself. Many security analysts argue that vested interests within the Bangladesh Rifles (BDR) – the border guards – have also developed to profit out of this network. Lobbying from these groups might go a long distance to explain Dhaka's vocal opposition towards India's move to fence the border between the two countries. It also explains the often-violent skirmishes between India's Border Security Force and the BDR, which leads to diplomatic spats with Delhi.

Third, India has maintained that ever since 1971, the birth of Bangladesh, a continuous tide of illegal migrants has flocked to India from Bangladesh, and lately it has accused border officials of facilitating this people-trafficking. However, the right-wing backlash to the Bangladeshi influx is equally worrying. Recently, the Akhil Bharatiya Vidharthi Parishad (All India Students' Union), an organization affiliated to the Hindu nationalist Bharatiya Janata Party, was involved in an anti-migrants campaign in Assam where it alleged that illegal aliens were determining the outcome of elections in 46 out of 126 constituencies in the state. It has been lobbying the central government in Delhi to repeal the Illegal Migrants Act, which will put the onus on the alleged immigrants to prove their nationality, and ease the deportation process.

Bangladesh is officially secular. However, over 90% of its population is Muslim. In such a scenario, a newly invigorated Islamist movement can pose a threat of the highest degree to the prevalent social order. To counter this dangerous trend, the first step is self-reflection. Dhaka must accept that the country is awash with jihadis, and must take India up on its offer of "any kind of assistance". Ironically, when the bombers struck, Prime Minister Khaleda Zia was signing a six-point treaty with Chinese Prime Minister Wen Jiabao in Beijing that would facilitate cooperation in business and provide Chinese help in building civilian nuclear plants in Bangladesh. That is pure bad press for a nation that has seen over three decades of infighting, uncertainty and disruption.

Re: India, China…Tortoise, Hare?

Asia Times Letters, 19.08.2005

Some readers should attack the message and not the messenger. I explicitly stated in my piece [India, China … tortoise, hare? [Aug 18] that "it is not for [me] to judge". I was comparing only one aspect of the two economies anyway – the corporate sector – so it can hardly be called a sweeping generalization. However, there is one point to be noted: rather than criticizing a certain point I made, other issues have been raked up, such as the "white man's laws" in India. I suggest a recent book to these voices: The Argumentative Indian by the Nobel laureate economist Amartya Sen. It ought to show how ancient the tradition of democracy is in Indian philosophy. But how was this issue relevant to the article in the first place? I am flummoxed.

August 17, 2005

India, China…Tortoise, Hare?

Asia Times, 18.08.2005

Consider, for a moment, a few haphazardly scattered jigsaw pieces of the India-China puzzle. First, a report on August 15 suggested that the Oil & Natural Gas Corporation (ONGC), India's flagship public sector company for overseas acquisition of energy assets, had submitted a US$3.2 billion bid for Petrokazakhstan. Second, the total number of overseas acquisitions made by Indian companies amounted to 42 in the first half of 2005, compared to 60 in the entire year of 2004. The value of the deals was recorded at $948 million.

On the Chinese side, a recent edition of The Economist contained a cover story on 'How China runs the world economy', examining the impact of soaring Chinese demand on global commodity prices and Beijing's recent revaluation of the yuan. But there was also a reality check – reports came of the failure of CNOOC's $18.5 billion takeover attempt of Unocal.

The idea that Chinese companies will buy the world has both aggravated xenophobia in the West, and been a pipedream for the cadres in Beijing. Several failed acquisition attempts in recent months come to mind: Haier's exit from the Maytag deal when Whirlpool entered the fray; China Mobile's loss to a UAE-based company in its takeover bid for Pakistan Telecom; or Minmetal's $7 billion attempt to buy Noranda fizzling out as a "damp squib". Among other debacles to hit China Inc, the lockout at the white goods maker Kelon, after the arrest of its top management for financial irregularities, instantaneously comes to mind.

The $1.75 billion purchase of IBM's PC division by Lenovo earlier this year generated much kerfuffle as well. However, this was more a sign of Lenovo's shrinking profit margins back home than the result of a distinct corporate vision. It could be argued that the move could spell trouble for the Chinese PC maker, as competitors such as Dell and HP were squeezing IBM, which is why it moved almost entirely into consulting by selling its underperforming PC arm. Moreover, Gartner predicts a 2–4% fall in global PC sales in the years to come, which means that Lenovo could be fighting for space within a declining market. Lenovo shares have fallen by 23% since the takeover.

Scholars such as Yasheng Huang (MIT) and Tarun Khanna (Harvard) have long argued about the better long-term prospects of India's economy, which is based on its strong domestic companies, vs China's primarily FDI-based growth. It could indeed be argued, using the aforementioned examples, that China's own companies are on weak legs. Although the country ranks above India on the global FDI confidence index, its stock markets fell by 15% in 2004, making it one of the poorest performers in the world. It fared the worst among all countries tracked by The Economist for two years running in 2004. On the other side of the spectrum, the Indian market grew by 20% over the same period. The Bombay Stock Exchange is at record highs of around 7,800 these days, despite $67 a barrel crude prices and the recent flood in Mumbai.

Shanghai Stock Exchange CEO Fang Xinghai put it aptly, "Why do you want to visit the trading floor? There is nothing to see." The fundamental cause of the fiasco in China's equity markets (the bear market on Chinese bourses is now four years old) has been the mismanagement, manipulation and constant intervention of political circles in the market's operations, which has effectively prevented firms from listing by merit and with freedom. As a result, confidence among investors has been terminally shaken. In February, authorities at Baosteel were forced to delay its initial public offering (IPO) worth $3.2 billion. Compare that with the recent announcement of listing by Sasken Communications, a Bangalore-based firm, whose IPO was oversubscribed by more than a dozen times.

It is common knowledge that business enterprises in China have a much better atmosphere to flourish than in India. But apart from the issues of good governance – better roads, an uninterrupted power supply, a low tax regime and flexible labor regulations – this business-friendly atmosphere also has certain dubious characteristics. These include an undervalued currency facilitating exports; cheap and unlimited credit for "blessed" firms; no default on non-payments for the same (as shown by the country's still huge nonperforming asset burden); low-priced land; subsidies; unpaid supplier bills waived and, ironically, (in light of the country's view of itself as "the worker's state") quite an oppressive labor regime.

India presents an interesting contrast – the physical infrastructure is creaky at best, the labor regime is inflexible, corporate taxes are still too high by ASEAN standards, and a demented preference policy for small firms still continues. But Indian companies are faring well in spite of these obstacles. Why? There are two primary reasons. First, democratic India retains an element of the rule of law, whereby conditions are the same for all firms, resulting in a reasonably competitive environment. Second, the government has wisely refrained from intervening in "new sectors" such as information technology, business process outsourcing and to a lesser degree, pharmaceuticals. Relaxation of overt regulations has been continuous, albeit slow.

To be sure, plentiful problems remain in both systems, and whereas "firms are often kept from bankruptcy by officialdom" in China, firms are deterred from taking risks in India, as the bankruptcy process takes nearly a decade. An even greater problem comes when we compare the two, since the successful firms in India and China almost never operate in the same sectors. But a few portrayals ought to deliver the point.

Take Huawei Technologies as an example. Here we have one of China's burgeoning telecom equipment companies, which recently announced a $100 million investment in a research and development center in Bangalore. Although its sales have zoomed to $3.8 billion in 2004 from $1.9 billion in 2000, its operating profit margins declined from 24% to 18% over the same period. Similarly, while sales of China National Petroleum Corporation for the first half of 2004 (the last time period for which information is available on the company website) increased by 4.7 billion yuan (US$580 million) compared to the first half of 2003, operating profits declined from 24.5% to 23.7% over a period when global crude prices have been soaring steadily. The corresponding figure for ONGC rose from 20% at the end of the financial year in March 2004 to 23% in March 2005. This was in spite of the damage to ONGC's numbers from numerous excise duties and taxes extracted by the Indian government, and the company's insistence on not passing on the increased cost of crude to consumers. As for the top IT companies in India like TCS, Infosys and Wipro, they operate at margins well in excess of 30–35%.

It is not for us to judge yet whether the tortoise has finally overtaken the hare. Both countries have different socioeconomic models, and just how different they are is becoming more conspicuous – the pieces of the puzzle are coming together. China continues to attract $60 billion of FDI each year, has soaring exports and an economy that grows in excess of 9% a year. But most of what is "Made in China" is in fact made by multinationals originating in foreign countries. Chinese companies are still finding their feet, despite the heavy backing they receive.

India receives about $7 billion in FDI, has a small but growing foreign trade ratio to GDP and grows at around 7% a year. Yet its companies, somewhat strangled by slow-moving politics back home, are prospering. Is it because their entrepreneurship has been nurtured by India's free credentials, instead of being "guided"? Hypothetically, if governance improves with time in India and the government in Beijing is not able to sustain its social and economic engineering indefinitely (both the most likely scenarios out of all the possibilities), where will the fate of India Inc and China Inc ultimately lie?

We return again to the story of the tortoise and the hare – and we all remember how that one ends, don't we?

August 16, 2005

Re: Gunning for Peace in South Asia

Asia Times Letters, 15.08.05

Siddharth Srivastava does not dwell much on the significance of the recent cruise-missile test by Pakistan (Gunning for peace in South Asia, Aug 13). All he does is state that the arms race was on. The implications [of the test] are threefold: First, it shows blatant disregard for international proliferation laws by China, [which] is openly supplying Pakistan with advanced offensive weapons. Second, it displays a new-found maturity within the Indian polity who refused to raise a ballyhoo over the test, since India already possesses the far superior BrahMos cruise missile, which is supersonic and has completely indigenous guidance. Third, the fact that Pakistan is reciprocating as much as it can to India's big plans of acquisitions and weapon development should be a long-term encouraging factor for India. This is simply because Pakistan's economy will continue to get more and more pressured under heavy defense spending, something which does not apply to India given its much larger and faster-growing economy. India can therefore push for issues such as SAFTA [South Asian Free Trade Area] which is coming into force on January 1, 2006, and lobby for faster reduction in tariffs by Pakistan. The underlying fact that is blatantly obvious is that on one hand India seeks to look at Pakistan more and more as in irritant as its economic and political prowess increases on the global stage, while Pakistan is feeling increasingly frustrated at India's obvious military superiority and is thus seeking symbolic victories to offset the ground realities.

August 11, 2005

Bird's–Eye View

The Telegraph, 11.08.05

Ramachandra Guha must be applauded for presenting an unbiased analysis of Manmohan Singh’s speech at Oxford University. As the author correctly notes, the most vehement opposition to Singh came from the right and the left, rather than from the centre ground of Indian politics. And these forces were never a part of mainstream Indian politics, even during the national struggle. While organizations like the Rashtriya Swayamsevak Sangh were against Gandhi’s ideals, the leftists owed their allegiance more to Russia than to India.

One can partially defend Singh, though. The raj undoubtedly induced doses of modernity — there were the railways, telegraph, telephones, automobiles, the concept of democracy and industries. Social evils like sati were stopped with the help of the British. In fact, the British were the “least of all evils”. Portuguese and French rule were even more barbaric. The British at least had respect for the constitutional process and rule of law, one of the prime reasons why Gandhi was such a phenomenal success. Above all, British rule bequeathed to India the idea of a nation-state, which till then had remained an intangible reality. No one can deny the ill-effects of the raj, but we need to acknowledge its positive impact as well.

August 2005

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