ABC of SEZ

The controversies surrounding the special economic zones refuse to go, as the land acquisition and rehabilitation issues continue to haunt. Government has now decided to put on hold clearances for new SEZs until new a rehabilitation policy is in place. A Times of India editorial on the subject (Jan 20, 2007).

The Centre has been forced to put on hold clearances for new special economic zones (SEZs). The SEZ policy has attracted controversy since it was first announced in 2005. The government's reason for the present pause is that it would wait for the national rehabilitation policy to be in place before allowing new SEZs. On the face of it, it is a sensible decision since large tracts of land are expected to be acquired by the government for SEZs. This is bound to force thousands of people out of their homes and present livelihoods. In the absence of a proper rehabilitation policy, resettlement of SEZ oustees would become a tardy affair. Already, the government is facing the heat in places where land has been acquired.

The opposition to SEZs is taking the shape of a loose coalition of disparate outfits ranging from grass-roots activists, including Medha Patkar and former prime minister V P Singh, to NGOs and even Left extremists. Sections of the political mainstream, including those within the Congress, are worried about the SEZ policy. The groundswell against land acquisition has been exploited by opposition parties at the local level to target the party in office. It is obvious that the Centre would not like the SEZ policy to become a magnet for opposition parties prior to assembly elections in Punjab and Uttarakhand, which have Congress governments.

That some of the vocal opponents of the SEZ policy have been valuable allies of the UPA during the 2004 elections would add to Congress's discomfort. The trouble over the SEZ policy is another indication of the flawed nature of Indian democracy. Policies are announced by the government without carefully studying their implications. In the case of the SEZ policy, the government should have worked out a consensus with all the political parties and civil society organisations. A top-down approach to development is fraught with the danger of alienating the state from even the intended beneficiaries. It is not too late to change. In the case of projects that are land-intensive, a dialogue with people who reside and live off that land is essential. The government needs to look at them as stakeholders in the project and treat them as venture capitalists, their capital being land. Fears of home and livelihood loss have to be addressed at various levels if the necessary, and inevitable, industrialisation of the Indian economy has to happen. Before setting out to implement the SEZ policy, the government should have followed the ABC of governance; it ought to have gained the trust of the people.

China’s red hot growth continues

China's economy expanded by 10.7% in 2006, topping the 10.4% growth recorded a year earlier and marking the fastest growth since 1995 and fourth consecutive year of double digit growth. The stronger-than-expected growth was largely fuelled by booming exports, stronger retail sales, a manufacturing boom and huge investments in new buildings, roads and cities. There are concerns that the blistering pace of growth may be unsustainable. Government has taken a series of measures to cool the economy like raising interest rates and pressuring banks to temper lending. Given the continued growth, further interest rate hikes may be on the cards. Slowing down over-investment in certain sectors of the economy like real estate and preventing stock market bubble are major challenges which the Chinese economy has been grappling with. China is also under intense pressure to allow its currency to appreciate more quickly against the dollar in the hopes of easing the country's mammoth trade surplus with the United States. The Yuan has been steadily appreciating against the dollar, strengthening to 7.77 yuan to the dollar from 8.26 in 2005. Besides the economic challenges, the enormous economic growth has also given rise to growing inequality and simmering social unrest.

BRIC by BRIC – Tier II Emerging Markets

Emerging markets have been the darling of portfolio and foreign direct investors in recent times, with the whole world recognising their growing importance in the global economy. Particularly, the so-called BRIC economies - Brazil, Russia, India and China – have attracted the lion’s share of investment inflows. The term BRICs which caught the imagination of the world was coined by Goldman Sachs in a 2003 report, which predicted that these four rapidaly developing economies will eclipse most of the current richest countries of the world by the year 2050.

The BRICs economies having established themselves as the future superstars, the search for more emerging stars is on as a larger part of the earth’s population is getting involved in the mainstream of the global economy. Investors and multinational firms are seeking opportunities in a number of smaller investment destinations that offer just as much, if not more, opportunity. Economist Intelligence Unit, in a recent study focused on tier II emerging markets, observed that more and more companies are including the second tier emerging markets in their corporate strategy.

The second tier emerging markets include countries of South-East Asia, such as Vietnam and Indonesia; those of Eastern Europe, such as Poland and Romania; those of Latin America, such as Mexico and Venezuela; and countries of Africa, such as South Africa and Nigeria. Here are some of the major findings of the Economist study.

• Second-tier emerging markets are becoming an established part of corporate strategy.
• Companies see these markets as sources of growth. Access to low-cost labour and resources is also an attraction.
• Poor rule of law remains a significant barrier to investment. Dealing with governments and regulators, poor rule of law and weak regulatory regime were identified as a significant challenge, poor infrastructure being another problem.
• Asia-Pacific is seen as the greatest source of opportunity.
• Improving relationships with local governments seen as the best way to manage risk.

Who are the hottest of them all?
Top five countries which are perceived as offering the best investment opportunites are Vietnam, Mexico, Indonesia, Poland and Romania. A brief about what makes these attractive and what are the risks and challenges.

Currently, investment in Vietnam is centred around heavy industry. Light industry, construction, hotels and tourism, and transport and telecommunications are also important sectors and with rising cost of labour in China and India, companies are looking to Vietnam as an outsourcing destination for IT services. Vietnam’s attractiveness as an investment destination is expected to increase with its entry into WTO.

In Mexico, NAFTA has been a major driver of foreign investment and electronics, computer and automotive industries have traditionally received the majority of FDI. Going ahead, substantial progress will be required on fiscal reform, labour reform and liberalisation of sectors such as telecommunications and energy, in order to realize the country’s potential as an investment destination.

Indonesia’s wealth of natural resources, particularly in the extractive sectors, has provided the main attraction for foreign investors. While mining and hydrocarbons sectors have been the largest recipients of FDI, pulp and paper, chemicals and financial sectors have also received significant inflows. In order to maintain its attractiveness, Indonesia will need to move fast on the financial, legal, regulatory and bureaucratic reforms, labour reforms and improvement in infrastructure.

Most of the foreign investment in Poland has come from companies headquartered in EU member countries. Manufacturing and financial sectors have the major beneficiaries. The attractiveness of Poland as an investment destination looks set to increase over the near term, with improvement in macroeconomic environment, relatively slow growth in wages and rapid growth in productivity.

Romania’s advantages as a location for investment include a domestic market of about 22m consumers and the potential—partly owing to a good geographical position at a crossroads of traditional trade routes—to emerge as a regional hub. It has a comparatively cheap and skilled workforce and a diversified industrial structure that allows intermediate inputs to be bought locally. The main concerns for foreign investors in Romania are the legal and regulatory systems, which remain unpredictable; excessive red tape; and the state's failure to ensure the uniform enforcement of the law.

Hong Kong is the world's freest economy

Hong Kong has been ranked as the world's freest economy for 13th year in a row by the Heritage Foundation because of its low taxes, openness to investment and lack of trade tariffs. The Asia–Pacific region is home to the top three economies on the index of economic freedom, with Singapore and Australia occupying the second and third positions respectively. United States, New Zealand, United Kingdom, Ireland, Luxembourg, Switzerland and Canada come next on the list. Burma, Zimbabwe, Libya, Cuba and North Korea are at the bottom of the list that covers 157 countries. The economic powerhouses of tommorrow - the so-called BRICs countries fare poorly on economic freedom, with Brazil at 70, India ao 104, China 119 and Russia 120.

The Heritage Foundation, a conservative Washington-based public policy research and advocacy group, produces the index of economic freedom in conjunction with the Wall Street Journal. The index, which measures 10 categories of economic variables, gives an indication of the level of governments' intervention in their country's economies. The 10 categories covered in the index are business freedom, trade freedom, fiscal freedom, freedom from government, monetary freedom, investment freedom, financial freedom, property rights, freedom from corruption and labor freedom. The average score (0 equals repressed, 100 equals free) was 60.6%, down slightly from last year but the second-highest since the survey began in 1995.

The report can be accessed at http://www.heritage.org/research/features/index/

Bank of Japan's assessment of economic & financial developments

The Bank of Japan’s policy board in its two-day meeting that concluded on 18th January decided, in a 6-3 vote, to keep its benchmark interest rate steady at 0.25 percent. This was seen as an apparent about-turn from the recent public remarks made by the bank authorities giving the impression that a rate hike was imminent. The decision has generated intense media scrutiny with concerns that the central bank may have caved in to political pressure to move slowly on monetary tightening. The political establishment has expressed concerns that raising rates too quickly might choke off the nascent recovery, as the economy faces weak consumer spending and no clear signs of inflation.

In its Monthly Report of Recent Economic and Financial Developments January 2007 released on 18th January, BoJ has said that the economic developments so far have deviated slightly downward from the expectations as outlined in the bank’s outlook presented in October 2006, mainly due to weaker-than-expected private consumption. Looking ahead, the bank expects that the economy will develop broadly in line with the outlook, as a virtuous circle of production, income, and spending is likely to remain intact. Here's the text of the report.

Japan's economy is expanding moderately. Exports have continued to increase, while public investment has been on a downtrend. Business fixed investment has continued to increase against the background of high corporate profits. Household income has also continued rising moderately. In this situation, private consumption has been on an increasing trend, although the pace of increase has been only modest. Housing investment has been increasing moderately with some fluctuations. With the rise in demand both at home and abroad, production has also been increasing.

Japan's economy is expected to continue expanding moderately. Exports are expected to continue rising against the background of the expansion of overseas economies. Domestic private demand is likely to continue increasing against the background of high corporate profits and the moderate rise in household income. In light of these increases in demand both at home and abroad, production is also expected to follow an increasing trend. Public investment, meanwhile, is projected to remain on a downtrend.

On the price front, domestic corporate goods prices have recently been somewhat lower than their levels of three months earlier, due to the drop in international commodity prices. The year-on-year rate of change in consumer prices (excluding fresh food) has been on a positive trend.

Domestic corporate goods prices are expected to be somewhat weak or stay flat in the immediate future, due to the drop in international commodity prices. The year-on-year rate of change in consumer prices is projected to continue to follow a positive trend, as the output gap continues to be positive.

As for the financial environment, the environment for corporate finance is accommodative. The issuing environment for CP and corporate bonds is favorable. Also, the lending attitudes of private banks have continued to be accommodative. Credit demand in the private sector has been increasing. Under these circumstances, the amount outstanding of lending by private banks has been increasing. The amount outstanding of CP and corporate bonds issued is slightly below the previous year's level. Funding costs for firms have risen slightly. Meanwhile, the year-on-year rate of change in the money stock is at the 0.0-1.0 percent level. As for developments in financial markets, in the money markets, the overnight call rate has been at around 0.25 percent, and interest rates on term instruments have been around the same level as last month. In the foreign exchange and capital markets, stock prices have risen compared with last month, while the yen's exchange rate against the U.S. dollar has fallen compared with last month. Meanwhile, long-term interest rates have been around the same level as last month.

Developments in Japan's economy have so far deviated slightly downward from the outlook presented in the Outlook for Economic Activity and Prices (the Outlook Report) released in October 2006, mainly due to weaker-than-expected private consumption caused partly by temporary downward pressure stemming from the unfavorable weather conditions. Looking ahead, however, the economy is expected to develop broadly in line with the outlook, as a virtuous circle of production, income, and spending is likely to remain intact. As for prices, domestic corporate goods prices are expected to deviate slightly downward from the expected trajectory, reflecting the drop in crude oil prices. Consumer prices have so far deviated slightly downward from the projection, partly reflecting the drop in crude oil prices, but they are expected to develop broadly in line with the projection.

India in 2007 – My Wish List

(1) PC & MS – May god give you the strength to work towards making India a developed economy without succumbing to the pressures from left partners and the temptations of populist politics.

(2) Corporate India – Let the good numbers continue to pour in. Let there be more global takeovers. But don't fall prey to nationalistic feelings; let the business and strategic interests prevail.

(3) Indian IT Companies – Look elsewhere (US slowdown is real, but there are other markets). Aur bhi gham hain zamane mein US mohabbat ke siwa !

(4) RBI – Do whatever it takes to avoid overheating and to balance the economic growth with inflation, notwithstanding the preference of the political establishment for low interest rates.

(5) Real estate prices and speculators – STOP. ENOUGH IS ENOUGH.

(6) Stock market investors –Learn to live with volatility and low return expectations, or stay away. This year will be different from past few years.

(7) Agriculture – The mother of all professions, your younger siblings – manufacturing and services – are booming. The national economy needs you to contribute more. When will you come of age?

(8) UP elections – Let there be a clear verdict. No more horse-trading, back-room maneuverings and strange bed-fellows, please.

(9) Karnataka Government – Need to do a lot more for Bangalore infrastructure, before the IT capital loses its sheen. And, do it fast.

(10) Onion, tomato, sugar, wheat and other things in common man's shopping cart – No runaway movement this year.