India bad economic reforms – investors moving to Indonesia, Philippines

India now is one of the worst country in terms of investment policy after series of changes occur beginning January 2012.

One of the highlights that hurt investors in India is the new policy for foreign suppliers for any EPC projects in India must fly to India in the end of the year to pay corporate income taxes even without any business activity inside India; pushing global suppliers away not to sell any Equipments and Materials for any EPC projects.

Internal revenue ruling of India dated April 1, 2012 hurts business investors mandating all equipment and materials supplies from around the world to report corporate income taxes for their income in selling supplies to any EPC project in India.

As funds flee, India's pain is Southeast Asia's gain

Southeast Asian nations are swallowing an outflow of money from India, as foreign investors lose patience with its policy paralysis and slowing growth and aim instead for more promising emerging markets such as Indonesia.

Corruption scandals and high inflation have added to India's woes, which have seen growth slow to a three-year low while the fiscal deficit widened to 5.9% of GDP in the last financial year.

"India was sold on the promise of high growth which simply hasn't panned out over the past four years," said Gautam Prakash, founder of U.S. based hedge fund Monsoon Capital.

Foreign investors pulled a net $540 million out from India in March and April, compared with $13 billion in inflows in January-February.

Foreign portfolio flows into Indian stocks have dropped 99% to just 5.17 billion rupees since a March budget that largely disappointed investors, compared with 427.36 billion rupees in 2012 before the budget.

Among the most significant developments from the shift has been the direction in which money is headed - with a big chunk flowing to Jakarta and other Southeast Asian capitals.

Two provisions put forward in the budget to tax indirect investments and combat tax evasion were the last straw for some global mutual funds, prompting an acceleration of money leaving India.

While the provisions were later put on ice, the prospect that such a tax could be proposed in India was enough for some investors to send their Asia-allocated money further east.

"You're seeing a situation where the 'I' in BRIC is being replaced by Indonesia," said Tim Condon, head of research and strategy for Asia at ING.

Left out

An emerging market brochure distributed by Franklin Templeton last month had data on India missing from a world map. From a global leader in emerging market investing, led by omnipresent guru Mark Mobius, that omission was telling.

India exposure in Asia's biggest equity fund, the $18 billion Templeton Asian Growth fund, dropped to 16% of its assets at the end of March from nearly 20% a year ago, while exposure to Association of Southeast Asian Nations countries rose to 35% from 31% during the period.

An ASEAN-focused equity fund launched by Daiwa Asset Management started with about $366 million in February and has since grown to manage about $430 million, while Fidelity Funds-ASEAN has seen a net inflow of nearly $250 million in the last year.

The bigger ASEAN markets do not necessarily offer a compelling case on valuation grounds.

"Generally we are more negative on India than we are positive on the alternatives, such as Indonesia and the Philippines where we feel the markets have perhaps run ahead of themselves," said David Baran, co-founder of Tokyo-based hedge fund Symphony Financial Partners.

"However, the ASEAN alternatives do have more positives and less negatives than India and we think that foreign investment outflows from India into the ASEAN alternatives are highly likely to increase if anything."

Indian shares trade at price to book value of 1.9 times, higher than 1.4 times for Asia Pacific shares as a whole but less than 3.1 times for Indonesia, 2.2 times for Thailand and 2.5 times for Philippines, according to data from Thomson Reuters StarMine.

The trend, nonetheless, is clear as money managers shift away from India, at least for the short-term, towards markets that offer the same favorable demographics and growth potential that had previously drawn investors to Delhi and Mumbai.

Betting on ASEAN countries

Funds from firms such as Aberdeen, Matthews and T.Rowe with mandates to bet in Asia invested a smaller percentage of their assets in India at the end of March compared with the year-ago period and more in Indonesia and other Southeast Asian countries than they did a year ago.

Part of the drop is due to a fall in the value of holdings, but fund flow data tracked by Lipper shows mutual fund clients are responding as well, giving more ammunition to funds betting on Southeast Asia and less to those investing in India.

Investors pulled out nearly $480 million from offshore India dedicated funds in April, increasing the 12-month cumulative net outflows to about $4.1 billion, according to data from Lipper.

By comparison, funds investing in Southeast Asia have seen net inflows of about $900 million in the year ending April.

The gap between the total assets under offshore India funds and that of Southeast Asia fell to a three-year low of about $13.5 billion in April, indicating investors were buying into a region that is home to nearly 600 million people.

Indonesia focused bond funds are in favour too, with eight such funds collecting a cumulative $355 million in the year ending April. HSBC Indonesia Bond Open received $200 million alone.

"We are definitely seeing more interest in ASEAN," said Matt Pecot, head of Credit Suisse's prime broking unit in the Asia Pacific.

Net exposure to India in Asia-focused hedge fund portfolios fell to 18.7% in April from 32.5% in January 2011, according to data compiled by Credit Suisse based on their client portfolios. The same measure for Indonesia surged to 51.8% in April from 24.7% in January 2011.

Net exposure refers to the difference between a hedge fund's long positions and short positions. A higher net exposure means funds are expecting the stock market to rise.

BRIC hits wall

Ten years ago, Chairman of Goldman Sachs Asset Management Jim O'Neill, then the bank's chief economist, combined the emerging market growth stories of Brazil, Russia, India and China to coin the famous "BRIC" moniker. O'Neill recently called India the "biggest disappointment" of the BRIC nations.

"India was a 9 to 10% growth economy when the BRICs were put together and now it's slowing. Indonesia was a 4 to 5% growth economy and it's moving in the other direction," ING's Condon said.

The top-three BRIC mutual funds by assets invested a smaller%age of their assets into India at the end of March than they did a year back, according to data from Lipper. They are also underweight compared with their benchmark, meaning they do not expect India to contribute to portfolio outperformance.

Templeton BRIC fund had 11.7% of its assets in India, its lowest since June 2009.

"India is getting trapped in that high fiscal deficit, high current account deficit situation and there is no easy way out of that unless it takes the tough steps," said Binay Chandgothia, portfolio manager at Principal Global Investors.

Indonesia and the Philippines, meanwhile, have neither current account nor significant budget deficits to worry about, although they do share some of India's problems such as their own fuel and food subsidies, Symphony Financial Partners' Baran said.

With combined GDP of $2 trillion, 10-member ASEAN is angling for foreign investment. Ranging from resource-rich Indonesia to impoverished Laos and financial centre Singapore, ASEAN is planning a union by 2015 to allow for free flow of goods, capital, services and labor.

"As far as stock prices go, foreigners own approximately 40% of the free float of the Indian market," Baran said.

"It will not take much of an exodus for this to have a significant impact on the market and there are clearly plenty of alternatives in ASEAN."

Read related: Business Standards

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Russia change mind – Pushing down Philippines & ASEAN for Sea Disputes

Russia Changes it's tone towards Philippines and ASEAN countries after Putin take office.

Previously, Russia pronounced its support to the Philippines and ASEAN countries for the disputes with China but after Putin took office, its changes it;s tone and giving favor to China's request to back them in the South China Sea Disputes.

Expressing "concern," the Russian Federation declared it is against any meddling by nations other than the claimant-countries in the South China Sea (or West Philippine Sea) territorial dispute, a Russian diplomat said over the weekend.

"This is our official position," said Russian Federation Ambassador to Manila Nikolay Kudashev told the Manila Bulletin at his official residence in Forbes Park, Makati City.

Kudashev said Russia is "mindful" of the fact that, like the United States, it is not a party to the dispute which escalated last month in a standoff between vessels of China and the Philippines at Panatag (Scarborough) Shoal.

"Otherwise it will sound like we are interfering in the internal affairs (of the claimant countries)," he said.

This is the first time that a Russian government official has spoken directly about conflicting claims over the islands in the South China Sea claimed in whole by China and partly by Taiwan, Vietnam, Brunei, Malaysia, and the Philippines.

However, Kudashev was quick to emphasize that the Russian government is also not "indifferent" to the situation in the area considering that the disputed region is very close to its border.

Kudashev said with regards to the freedom of navigation, Russia is one with the US in that they are both "concerned" about the said issue.

"We are continuously committed to the issue of freedom of navigation," he said. "We are part of this region and we believe the freedom of navigation is one of the aspects of the solution to the larger problem of the South China Sea which could be secured by the regional countries, first and foremost."

"We need secured trade, secured communication, that's for all countries like China, US, the Philippines, Singapore and for everyone," he added.

The Russian envoy said what Russia would favor is "a peaceful, negotiated solution by the regional countries, by the countries involved themselves, first and foremost, on the basis of talks and dialogue."

"You could regard it as favoring bilateral solution, if in the course of bilateral talks some other solutions would emerge we would not deny them," said Kudashev. "The UNLOS (United Nations Convention on the Law of the Sea) would provide a good and solid basis."

"Frankly speaking, it is impossible to come to any conclusion, to any solution without talking to one another," the Russian envoy said as he noted that the priority lies with the countries of the region themselves.

With regard to the "outsiders" or countries not directly involved in the dispute such as the United States, Russia, and Europe, Kudashev said that they all possess "convincing legal experience, legal practice and maybe even some ideas."

"If they are being invited by consensus to enrich the legal process, the negotiating process, then it is okay," the ambassador said. "Well, otherwise we would prefer the regional countries to come to a consensus first," he added.

Russia and China are known to agree entirely with each other's positions on certain issues including the crisis in Syria and on North Korea's nuclear program, including a host of other things.

Just last month, both countries undertook their first joint naval exercise following four military exercises involving the two nations since 2005.

The April 22-27 drill took place in the Yellow Sea off China's east coast and involved a total of 16 vessels and two submarines from the Chinese navy and four warships from the Russian navy's Pacific Fleet as well as three supply ships which was summoned for the exercise.

The drill was supposed to focus on joint maritime air defense and defense of marine traffic arteries, including subjects of joint escort, maritime search and rescue, anti-submarine tactics as well as joint effort to rescue hijacked vessels.

Apart from the existing fishing ban in the Panatag Shoal, Malacañang is now discouraging any "patriotic journey" to the disputed area to avoid the escalation of tension with China following the botched trip of a former marine officer in the area.

Presidential Spokesman Edwin Lacierda urged people to show their patriotism by rallying behind the government's efforts to seek a peaceful resolution to the territorial row.

Former Marine officer Nicanor Faeldon earlier planned to visit Panatag Shoal to protest China's claim over the place but was blocked by President Benigno S. Aquino III at the last minute.

The President phoned Faeldon, who had wanted to raise the Philippine flag on the shoal, and asked him to call off his voyage amid diplomatic efforts to resolve the tense standoff.

"I think we can show our patriotism by supporting the position of our government and that would be sufficient expression of support, sufficient expression of patriotism," Lacierda said.

Several recent developments suggest that the situation at the disputed shoal could be much more dangerous, noted an American conservative think tank based in Washington DC.

Dean Cheng, of the Asian Studies Center at The Heritage Foundation, said American policymakers would do well to keep a close eye on these latest developments in the South China Sea involving China and the Philippines, a formal US security treaty ally.

"It could have major implications for the US," Chen said in his paper "Standoff Between China and an American Ally in the Pacific."

Chen cited recent reports that China, the fourth largest source of tourists to the Philippines, has halted tours and called upon Manila to safeguard the safety of those Chinese tourists already in the archipelago.

At the same time, the Chinese have begun to quarantine shipments of Philippine bananas on the grounds that they may be carrying agricultural pests.

Chen said that although neither of these developments might be directly linked to the Scarborough Shoal situation, "they smack of an attempt to bring China's economic power to bear on a diplomatic cause--similar to the heavier-handed economic measures the Chinese took against Japan during the 2010 Senkaku/Diaoyutai incident."

These group of uninhabited islands located in the East China Sea are being claimed by Japan and China.

At that time, Chen said China cut off all shipments of rare earth minerals to Japan, seeking to exploit its dominant position in that market.

Thus far, Chen stated that the Chinese navy has not played a "direct role" as the Chinese vessels accused of encroaching into Philippine territory have all come from civilian agencies.

However, China has undeniable assets at sea, including a naval task force comprising two guided missile destroyers, two frigates, and an amphibious ship operating near Okinawa on exercises, he said.

"Any diversion of this force to Scarborough Shoal would constitute a major escalation of the situation," Chen pointed out.

With the Chinese leadership focused on their "internal succession struggles, to the point of possibly delaying the scheduled Party Congress when the new leadership will be officially announced, Chen said few senior leaders are likely devoting their full attention to this situation.

He said recent reports that head of internal security Zhou Yongkong has been forced to relinquish his powers as part of the ongoing Bo Xilai drama only further underscores "how many things are on Chinese leaders' plate s— and therefore how little attention they may be paying to this."

"Given the internal political situation, though, it is unlikely that anyone would be willing to appear 'weak' by being conciliatory," said Chen. "This may explain the Chinese rejection of the Philippine proposal for arbitration of the dispute under the Law of the Sea Treaty, which both Manila and Beijing have signed."

"One would hope that both parties to the dispute at Scarborough Shoal find a peaceful, face-saving way to back out of this crisis," he added. "But it bears watching by American policymakers in case this does not prove to be the case." (With a report from Genalyn D. Kabiling)

Read related: Manila Bulletin

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Scarborough Shoal, Taiwan is Part of Malay Archipelago – China later than India Exploration.

East Indian Archipelago - Prior to Han Dynasty in the early 3rd Century

The conflict between the Philippines and China over the Scarborough Shoal may appear at first sight a minor dispute over an uninhabitable rock and surrounding shallow waters. But it is hugely important because it encapsulates China's assumption that the histories of the non-Han peoples whose lands border two-thirds of the waters known in English as the South China Sea are irrelevant.

The Philippine case over Scarborough Shoal (Also called Panatag Shoal, Bajo de Masinloc  and China called Huangyan)  has been mostly presented as one of geography. The feature is 135 nautical miles from Luzon, the main Philippine island, and roughly 550 nautical miles from the mainland of China and 300 Nautical  miles from the tip of Taiwan. It is thus also well within the Philippines' Exclusive Economic Zone of 200 Nautical Miles by the United Nation Convention in Laws of Sea (UNCLOS) .

China leapfrogs these inconvenient geographical truths to come up with justifications of its claims which can be applied to the whole South China Sea and thus justify the non-famous dotted line on map which vaguely defines them. This line has never been precisely delineated but comes well within the 200-mile limits of all the other countries, and close to Indonesia's gas-rich Natuna islands.

In the case of the Scarborough Shoal, its historical justification is that this rock and surrounding shallow water is mentioned in a Chinese map of the 13th century when China itself was under alien - Mongol - rule. The fact that a vessel from China had visited the shoal and recorded its existence has thus become one basis for its claim. Very similar pieces of history are trotted out to justify claims to other islands visited by ships from China. Likewise, China's assumption of hegemony is often based on the fact that foreign merchant ships had to pay taxes to trade with China.

History, however, shows that Chinese sailors were latecomers to the South China Sea, let alone to onward trade to the Indian Ocean. The seagoing history of the region, at least for the first millennium of the current era, was dominated by the ancestors of today's Indonesians, Malays, Filipinos and (less directly) Vietnamese. Thus, as China's own records reveal, when the 4th century Buddhist pilgrim Fa Hsien, went to Sri Lanka, he travelled from China to Sumatra and then on to Sri Lanka in Malay ships.

This was not the least surprising given that during this era of sea-going prowess, people from Indonesia were the first colonisers of the world's third largest island, Madagascar, some 4,000 miles away. (The Madagascan language and 50% of its human gene pool are of Malay origin.) This was a thousand years before the much-vaunted voyages of Chinese admiral Zheng He in the 15th century.

Malay seagoing prowess was to be overtaken by south Indians and Arabs, but they remained the premier sea-farers in Southeast Asia until well into the era of European dominance of the region. Indeed, the Malay-speaking Hindu (like much of Southeast Asia at that time) mercantile state of central Vietnam dominated South China Sea trade until the 15th century. The 10th century Arab traveler and geographer al-Masudi made reference to the "Cham Sea", and trade between Champa and Luzon was well established long before the Chinese drew their 13th century map. As Scarborough Shoal not only lies close to the Luzon coast but is on the direct route from Manila bay to the ancient Cham ports of Hoi An and Qui Nhon, it was known to the Malay sailors long ago.

All in all, the Chinese claim to have 'been there first' is like arguing that Europeans got to Australia before its aboriginal inhabitants. But given China's reluctance to acknowledge that Taiwan was Malay territory until the arrival of European conquerors, and then of a surge of settlers from the mainland, such refusal to acknowledge the rights of other peoples is not surprising.

At times, China itself seems to recognize the flimsy basis of some of its historical claims. In the case of the Scarborough Shoal, it backs up its position by reference to the Treaty of Paris 1898 concluding the Spanish-American war and yielding Spanish sovereignty over the Philippine archipelago to the US. This did not mention the shoal but described a series of straight lines drawn on the map which left the shoal a few miles outside the 116E longitude defined by the treaty.

Given that China rejects "unequal treaties" imposed by western colonialists, it is remarkable to find it relying on one between two foreign powers conducted without any reference to the inhabitants of the Philippines. Vietnam can equally well claim all the Spratly Islands as inheritor of French claims over them.

For sure, China has the power to impose its will. But its aggressive stance towards the Philippines, so often seen as an especially weak state, has alerted others, including Japan, Russia and India as well as the US, to its long-term goal which is not ownership of a few rocks but strategic control of the whole sea, a vital waterway between northeast Asia and the Indian Ocean, the Gulf and Europe. The Scarborough Shoal is not just a petty dispute over some rocks. It is a wake-up call for many countries.

The writer is former editor of the Far Eastern Economic Review.

http://articles.timesofindia.indiatimes.com/2012-05-18/edit-page/31750581_1_south-china-sea-chinese-map-china-leapfrogs

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