Intellectual Thoughts by Sanjay Panda: November 2007

Malaysia- Truly Racist

For a country that abhors public protests and suppresses them with strict rules against illegal assembly, Malaysia has had two big demonstrations in Kuala Lumpur just this month. Two large street rallies within a month by Indian ethnic group may be a sign that the 50-year-old code defining the rules of engagement between the state and the minority ethnic groups.

The biggest source of discontent is “race” since the minority Chinese and Indian communities are disenchanted with economic policies that favor heavily to the majority Malays.

Free-trade talks with the U.S. and Australia have been delayed and the ones with New Zealand have had to be suspended primarily because Malaysia's policy of discouraging non-Malays “including foreigners” from bidding on government tenders is unacceptable to these countries. The same issue might also jeopardize a free-trade deal between the Association of Southeast Asian Nations of which Malaysia is a member and the European Union.

When non malay ethnic groups protested against the preferential treatment for Malays in every walk of life they were brutally harassed & supressed. Malaysia must give give equal rights and equal opportunity to all her citizens irrespective of their race. Unless that happens Malaysia must be isolated from all the global forum including trade and investment. As of now it seems “Malaysia is not truly Asia but truly racist”.

FIIs may face tougher entry norms

The finance ministry of Govt of India, wants to restrict investments by foreign institutional investors (FIIs) from countries whose market regulatory structure is not compliant with principles laid down by the International Organisation of Security Commissions (IOSCO).

Drawing from the Ashok Lahiri committee recommendations, the ministry, which had earlier asked Sebi to prepare a negative list of tax havens, has asked the regulator to prepare a list of non-IOSCO jurisdictions. This move by the ministry may lead to a blueprint for FII investments in the country. Sources said it was important to ensure that an entity investing in India was regulated by a credible regulator back home, which followed internationally-accepted principles of due diligence. A country becomes a tax haven only because of a favourable double taxation avoidance agreement with India. A tax haven can lose its status with changes in the tax treaty.

While a country which is not a tax haven may not necessarily have a robust security markets regulatory structure in conformity with global best practices, a tax haven, in some cases, could follow global best practices in its security market regulations.

The Spain-headquartered IOSCO is the international standard-setter for securities markets with its norms applicable in more than 90% of world’s securities markets. All IOSCO members have to sign a memorandum of understanding, follow the principles endorsed by the body and facilitate exchange of information among the international community of securities regulators.

The organisation follows a comprehensive methodology which enables an objective assessment of the level of implementation of the IOSCO principles in the jurisdictions of its members and the development of practical action plans to correct identified deficiencies.

The body aims at facilitating cross-border co-operation, reducing global systemic risk, protecting investors and ensuring fair and efficient securities markets. It has 109 ordinary members, 11 associate members and 63 affiliate members.

Incidentally, market regulators in some popular tax havens including Mauritius, Cyprus and British Virgin Islands have MoUs with IOSCO. The majority of the foreign investment into the securities market in India comes from Mauritius because of the existence of a favourable tax treaty between the two countries. While Sebi is an associate member, Forwards Markets Commission of Mauritius is an ordinary member of IOSCO which was set up in 1983.


Investors pull out $2.1 bn from BRIC funds

Stock market volatility forced investors across the world to pull out five billion dollars from emerging market equity funds last week, including over two billion dollars from funds focused on four BRIC Markets.

China accounted for more than half of the total outflow from BRIC funds, while India, Russia and Brazil together shared the remainder, according to international fund tracking firm EPFR Global.

"With sub-prime and global credit fears being fuelled by almost daily news of fresh write-downs in the financial sector and evidence mounting that the US Economy will slow going into next year, investors retreated from equity funds during the second week of November and shifted to the relative safety of money market funds," EPFR said in its weekly report.

During the second week of November, emerging market equity funds reported a net outflow of 5.58 billion dollars, while those focused on developed Markets saw an outflow of 5.07 billion dollars.

Nearly all the outflow from the developed and emerging Markets appears to have been absorbed by the money market funds. According to EPFR, the money market funds recorded a net inflow of 10.1 billion dollars during the week, taking their total inflow since the beginning of August to 100 billion dollars.

"Money market funds currently offer two things that investors like. They are very liquid, which allows investors to move rapidly back into Markets where they see value, and most of them come with an implicit guarantee that you wont lose any money something that's very attractive in the current investment climate," EPFR Global Analyst Cameron Brandt said.

CII disputes growth claims of India

Contradicting the growth numbers given out by the government, industry body Confederation of Indian Industry (CII) has on 11th Nov claimed that 17 sectors have recorded negative growth in the first half of the current fiscal."It is a matter of concern that more than 50 per cent of the manufacturing sector has recorded either moderate or negative growth," said CII Industry Council Chairman Satish Kaura while releasing the ASCON Survey conducted by the chamber.
Contradicting the government's claim that only one of the 17 industry groups (based on two digit NIC classification) recorded negative growth in April-August 2007, the survey said 17 out of 91 sectors showed negative performance during the first half of the year(April-September).The survey attributed low growth in various segments of manufacturing to rising interest rates, reduced credit availability and a strong rupee.

The Free Trade Agreements (FTAs) signed by the government with some of the countries in the last two years too have adversely affected manufacturing sector performance, the survey said, adding, "automobile industry, including motorcycles and three-wheelers, are amongst the sectors in the negative sales growth category."

The CII-ASCON survey further revealed that cement, energy meter, ball and roller bearing, polymer, utility vehicles, refrigerators, rubber footwear, bus and truck tyre etc have shown moderate growth, while fertiliser, machine tools, capacitors, motorcycles, edible oil etc are in the negative growth category.The official Index of Industrial Production (IIP), however, had said that only metal products and parts (except machinery and equipment) showed negative growth during April-August 2007.

According to the CII ASCON survey, out of 91 sectors, 15 sectors reported excellent growth rate of more than 20 per cent, 22 sectors recorded high growth rate of 10-20 per cent, 37 sectors posted moderate growth rate of less than 10 per cent and 17 sectors reported negative growth.The percentage of sectors in excellent and high growth category declined, while that for the moderate and negative category increased over the period April 2007 to June 2007.

Scooters, mopeds, electric fans, sponge iron, circuit breakers and transformers were in the excellent growth category, while those in the high growth segment included asbestos, cement pig iron, power cables, industrial valves, textile machinery, transmission line towers, air conditioners and microwave ovens. As regards exports, the survey said, five sectors have shown excellent growth, five sectors revealed high growth, eight sectors registered moderate growth and five sectors registered fall in exports.

Exports of cement, ceramics, mopeds and rubber goods fell during the first six months of the current fiscal, it added.Machine tools, air-conditioners and motorcycles registered excellent growth performance, while those in the high growth category included vehicles, three-wheelers, industrial valves and cold rolled steel, the survey said.

Indians most optimistic on economy: McKinsey

Business executives in India are the most optimistic across the world when it comes to their take on the overall economy and inflation over the next six months, according to a survey by McKinsey.According to the Economic and Hiring Outlook survey by McKinsey for the latest quarter, 77% Indian executives said they think the economy would get ‘better’ in six months. This is the highest for the executives from any other region including China, Europe, North America and other Asia-Pacific nations.

The optimism level of 77% in India is considerably higher than the global average of 36% and the Asia-Pacific average of 46%. In China, 65% executives said they expect the country’s economy to improve in the next six months, while it was just 26% in North America. On inflation, 19% Indian executives said they expect it to decline in the next six months, which was the highest for any other region and significantly above the global average of 9% and Asia-Pacific average of 4%. In China, 13% said they expected inflation to moderate.

Just 27% of the executives in India said they expect inflation rate to increase in the next six months, which was the lowest in the world. It was the highest in China at 71%, while the global and Asia-Pacific averages stood at 39% and 52%, respectively.The survey found that around 53% Indians expect inflation to remain unchanged - higher than the global average of 51% and 43% in Asia-Pacific.

"More than half of the respondents expect inflation to remain stable over the next six months. That pattern holds even in India where three months ago, only a fifth of the respondents expected inflation to remain stable, but more than half currently do," McKinsey said.