The timing couldn't have been better, or worse, depending upon one's perspective. When the UPA government in India seeks to control markets, by banning exports and futures trading and fixing prices for producers, China is making yet another attempt to increase its attractiveness to domestic and external players by establishing more market-based rules in new areas, and removing either biases or the hand of the state. The first law, passed at the National People's Congress last week, ends decades of discrimination in favour of foreign investors who have so far paid a tax of just 15 per cent, versus the 33 per cent paid by local Chinese firms; both rates have now been equalised at 25 per cent, though there is some leeway that will allow the existing foreign firms in the country to pay lower taxes for a few more years. India, it is true, has always taxed both foreign and local firms at the same effective rates, but treaties like the one with Mauritius ensure that most of the investment routed from abroad gets preferential tax treatment. In the light of what China's just done, should that position be reviewed? | |
| The other major law passed by the National People's Congress relates to recognising property rights. While the lower tax rates were an important attraction for foreign direct investment in the early years, it is the lack of well-defined property rights (codified, and therefore challengeable in courts of law) that began to figure more prominently on investors' radar screens. Indeed, there have been celebrated cases where foreign investors trying to secure their rights as creditors from state-owned firms, usually from the sale proceeds of land owned by the firms, have found the land being re-appropriated by the state. It must be assumed that this will now be a thing of the past, and investors in the country should therefore feel more secure about their rights. |
| |
| For the country's banks, hobbled by bad and dodgy loans, the law will be a help as they will now have collateral that can be seized. The tax cut will also boost the revenue of domestic banks""a JP Morgan estimate, cited in the Financial Times, says a 1 per cent cut in income tax will lift the banks' fair value by 3 per cent. While the changes in property laws do not apply to rural areas as yet, many expect this to happen in due course since the lack of rural property rights has been a major reason for the poor investment levels in China's agriculture""the speed at which this may happen could vary, as the right of eminent domain remains relevant to China continuing to provide land for big industrial projects. |
| |
| Other laws expected to be discussed at the Congress include one on anti-trust legislation and another that could give workers some say in contracts with their employers. All these laws, those passed and those in discussion, emanate from China's accession to the World Trade Organisation and are part of the process of making that country abide by laws that the rest of the world believes to be essential. While it may be some years before the impact of these laws is felt, especially the ones pertaining to property laws, they're aimed at making China a more attractive place to invest, for local players as well as for foreigners. |
| |
| The question that India must ask itself is whether it is improving its own business environment at the same speed. Several long-talked-about reform measures continue to hang fire, and the government gives every impression of having given up all attempts to push through market-oriented legislation in areas like labour policy, pension reform and the like. |
| |
|
| |
