The Hindu Business Line : Blending socialist ideals with market imperatives

Reports doing the rounds suggest that the UPA Government is all set to unveil a raft of economic policy reforms once the the Assembly elections are over, a couple of weeks from now, with the Planning Commission preparing a dossier on such issues as permitting 100 per cent FDI in insurance and as also in retail trade.

These on-again-off-again signals are a reflection of the way the reform-resolve wavers in the face of protests from the parties supporting the Government, dampening the fervour of investors, domestic and foreign. In fact, in the run-up to the Assembly elections, particularly in Kerala and West Bengal, the CPI(M) General Secretary, Mr Prakash Karat, has made it clear that his party's interventions in the policy matrix would be more than perfunctory after the Assembly polls.

Such constant tensions may limit the policy options of the coalition Government, but one can only marvel at how China has managed to marry Socialist principles with market norms to give its economy a novel orientation; China has now become a byword for innovative thinking buttressed with the characteristic pragmatism.

The Left parties may be well-advised to take a look at the recent, first trade policy review of China by the World Trade Organisation (WTO); the policy statement China forwarded to the WTO is a real eye-opener.

China's expenditure control

The WTO says China is a moderately taxed country with total tax revenues accounting for a little over 15 per cent of GDP in 2004. The overall fiscal situation is seemingly sound with rapid growth of tax revenues and tight control over expenditure, bringing the overall budget deficit down to around 1.3 per cent of GDP and keeping the public debt stable at around 20 per cent of GDP.

China has also used its tax system to encourage investments, especially by foreign companies, which enjoy lower tax rates (15 per cent and 24 per cent) than domestic companies (33 per cent) and enjoy tax holidays if they invest in targeted sectors or regions.

In their submission to the WTO, the Chinese authorities have stated that in insurance services, there were 82 companies by the end of 2005, 40 of them being foreign-invested firms.

The premium revenues of foreign-invested insurance companies have expanded rapidly, 29 times faster than that of domestic insurance companies.

For the first 10 months of 2005, the premium revenues of foreign property insurance companies increased by 28 per cent over the corresponding previous period, while that of foreign life insurance companies rose 356.1 per cent.

Market development

In distribution (retail) services, the Chinese government has implemented a market opening for foreign-invested enterprises by eliminating the restrictions on the number of business units, geographical location and foreign ownership. Since 1992, China has cumulatively approved 1,341 foreign-invested distribution enterprises, which have opened 5,657 retail shops.

Last year alone, newly established foreign-invested distribution enterprises outnumbered the total approvals from 1992 to 2004. The market-share of large foreign-invested supermarket chains in the China continued to expand. By 2005, they accounted for more than a quarter, even over 50 per cent in a few cities!

In a bid to promote domestic consumption, China launched an initiative last year, "Market Development Project Covering Thousands of Villages and Towns". This is designed to gradually popularise chain-store operations in the rural areas; standardised farmer shops cover 50 per cent of the villages and 70 per cent of the towns across the country within three years; building a modern retail distribution network in the rural areas thus making shops in the urban areas play a leading role, and those in the villages play a fundamental role. There are 1,150 retail and wholesale enterprises, which have started pilot projects in 777 cities and counties nationwide; 71,000 standardised farmer shops were established and renovated within the year.

Beneficial FDI

China has said its accession to the WTO in December 2001 marked a new era of the opening up of its economy. After joining the WTO, the regional opening up approach was replaced by a nationwide open policy; the coverage extended from traditional trade in goods to trade in services; the level of market access further increased, and access conditions were codified into laws and regulations with greater transparency.

China concedes that foreign direct investment has had a most favourable impact on the development of its economy in the opening up process. In 2004, industrial value added by foreign invested enterprise accounted for 28 per cent of national industrial added value. The former's exports accounted for 57 per cent of total national exports. Foreign-invested enterprises employed 24 million people, accounting for 10 per cent of the non-rural workforce!

Spurred by these encouraging trends, Chinese authorities told the WTO that they will continue efforts to make it attractive for multinational enterprises to move their manufacturing processes involving high technology and high value-added products, as well as their research and development, to China.

The Government would, they said, also promote cooperation between domestic and foreign enterprises on technology, R&D, resource procurement and market development.

Thus, China's economic reforms, although gradual, have distinctly increased its market orientation, making it one of the fastest growing economies in the world by a deft blending of Communist ideals with market imperatives!

It is time the UPA Government persuaded its supporting allies of the Left to be pro-poor and pro-growth by pushing for more reforms instead of less, and to be partners in the country's quest to become an attractive investor destination.

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