SMU Political-Economic Exchange

AN SMU ECONOMICS INTELLIGENCE CLUB PRODUCTION - Demystifying Indias Budget for 2013-14 - The Ghost of Mao and Confucius behind the Internet Censorship in China - ASEANs Economic Integration (Part 2)
The Fortnight In Brief (4th March to 17 th March) US: Recovery vs. Sequestration The February jobs report released 8 March saw non-farm payroll employment increase by 236,000 jobs in professional and business services, b uilding and healthcare, further pushing unemployment down 0.2% to 7.7%, the lowest levels since Dec 2008. The better than expected jobs report amidst sequestration cuts pushed the Dow Jones to new highs. Consumer sentiments on the other hand fell to its lowest since Dec 2011 as consumer weighed the higher payroll tax and potential effects of sequester. Manufacturing continues to lead the recovery as output in factories, m ines and utilities edged up 0.7%, exceeding projections. Housing construction is also expected to provide the tailwind propelling growth this year. Asia Pacific: Chinas Commitment and Australias Deficit Chinese Premier Li Keqiang has expressed the need for China to maintain a 7.5% economic growth through 2020 to double its per capita income. He reiterated Chinas stance to expand domestic demand and vowed to fight graft while cutting regulations and bureaucracy. Meanwhile, Australia has taken a massive hit to government revenue. The national budget fell A$4.6 billion into deficit in the first month of 2013, increasing the shortfall to A$26.8 billion. This is owing to weaker growth, lower prices for Australias resources and a strong local currency. EU: Setting Priorities for the EU European Union (EU) leaders met last week to set economic and social policy priorities for the 27- nation bloc, with many countries still struggling with recession and record unemployment, coupled with weak investor confidence in the euro. Known as the European Semester, the system aims to shape policies in line with EU goals at an early stage. For countries that have already broken deficit rules, the EU will deal with them using the excessive deficit procedure. For 2013, the economic and social priorities for the EU are: 1) Pursuing differentiated, growth-friendly fiscal consolidation. 2) Restoring normal lending to the economy. 3) Promoting growth and competitiveness. 4) Tackling unemployment and social consequences of the crisis. 5) Modernizing public administration.
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ISSUE 35 18 MARCH 2013

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PROUDLY SUPPORTED BY
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S&P 500

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MSCI AC Asia Ex.

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Demystifying Indias Budget for 2013-14

By Mrigank Kanoi, Singapore Management University
The Congress Party Government1 in India is historically known for setting unrealistic targets in order to falsely keep the investor-confidence high. While this was not given much importance during the days of robust growth, a similar move will most likely backfire given the current slowdown. With the general elections coming up in 2014, the governments actions will receive closer scrutiny, not only from the voters, but also from the private sector. Will the Congress Party Overpromise and Under-Deliver Again? Figure 1: GDP Growth and Disinvestment
10% 8% 6% 4% 2% 0% 2010 2011 Planned 2012 Achieved 2013 GDP Growth Target vs. Actual 500 400 300 200 100 0 2011 2012 Planned Achieved 2013 Disinvestment Target vs. Actual

Source: Frontier Strategy Group Given the historical trend of over-promising and under-delivering (see graphs above), Indias newly appointed Finance Minister P. Chidambaram has set the budget for a relatively neutral course with no dramatic proposals or highly unrealistic targets. The 2013-14 Union Budget focuses around increasing the planned spending, cutting down of subsidies2, and encouraging more investment. Companies should be encouraged by the governments plan to increase the size of the overall expenditure by 16.4%, majority of which will come from increase in planned outlay (see graph below) while reducing the non-planned expenditure, which entails interest payments, subsidies and defence. Figure 2: Planned Increase in Government Spending
50% 29% 18% 7% 22% 30%

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Figure 3: Union Budget 2013-14: Highlights Macro Policy

Recommended Proposals
New regulatory authority setup to speed-up road projects: 3000 km of road projects will be awarded in the first six months of 2013-14 Delhi Mumbai Industrial Corridor (DMIC) to be provided additional funds Two new ports will be established in West Bengal (Eastern India) and in Andhra Pradesh (Southeastern India) Work begins on two smart industrial cities in Gujarat and Maharashtra Infrastructure tax-free bond of up to US$10 billion available to raise funds Cabinet Committee on Investment (CCI) set up to speed fast-track large projects Companies investing US$20 million or more in plant and machinery between 2013 and 2015 will be entitled to deduct an investment allowance of 15% of the investment expense Confirmation of the Land Acquisition Bill will likely bring significant clarity for investors Further interest rate cuts by the Reserve Bank of India (RBI) likely to improve the investment environment Subsidy as a percentage of GDP is budgeted to fall by 11% Petroleum subsidy cut by a sharp 33% Fertilizer subsidy has been left unchanged (flat) Food subsidy increased by 6% (already accounts for 35-40% of the total subsidy bill) Effective corporate tax rate for foreign companies revised from 42.02% to 43.26% Citizens with an income of US$185,000 or more to pay 10% surcharge Tax relief for very-low-income individuals through token tax-credit Disinvestment target more than doubled to more than US$10 billion Majority of the target is to be met by selling minority stakes in the public sector enterprises

Infrastructure

Investments

Subsidies

Direct Taxes

Disinvestment

Source: Union Budget 2013-14, Times of India, Economic Times Mapping Policy Movements: Focus on Tackling Indias Fiscal Deficit3 The FY2014 Union Budget has received mixed reactions from the private sector as proposed policy changes appear more favourable to certain sectors, including agriculture and manufacturing. Moreover, while an increase in planned investments is seen as a positive sign, the Finance Minister has left some unanswered questions when it comes to tackling the persistent issue of a ballooning fiscal deficit. The graph below not only highlights the impact of various proposals on the business environment, but also considers their likelihood of implementation, given the low level of trust in the Indian Government.

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Figure 4: Impact/Likelihood of Proposals

Source: Frontier Strategy Group, Own Estimates The positions occupied by dis-investment and subsidies on the graph above tell an interesting story. It is worth mentioning now that these are the two tools being utilized by the government to reduce Indias fiscal deficit. When it comes to subsidies, the argument that subsidy cuts will be difficult to implement is almost universally acceptable. While the government expects cuts in petroleum expenditure, it is also likely to take on a populist approach in a pre-election year. Furthermore, the governments subsidy target last year was 1.9% of GDP, whereas revised estimates are well over 2.5%. Failure to implement the planned subsidy cuts would result in the government overshooting its Non-Plan Expenditure once again. Moving on to dis-investments, this process involves the sale of the governments stake in state-run companies. Divestment receipts as a % of target for financial years 2011, 2012, and 2013 were 57%, 45%, and 80% respectively. Achieving the targeted divestment of Rs.558,140 million (>US$10 billion) the highest ever target set is thus unlikely to say the least. This suggests the government may fall well short of collecting its targeted revenue, as it fails to generate cash by using subsidy cuts and divestments in state-run companies. Key Signposts: Four Movements to Closely Monitor in 2013 Following are some specific milestones that the private sector should have on their radar for 2013, in order to gauge the pace and direction of the changing political environment during this crucial pre-election year: 1. Parliamentary Debates on Reforms During Budget Session (February to May): The budget is one of the many avenues for introducing policies. As such, stakeholders in the 4 Copyright 2012 SMU Economics Intelligence Club

Indian economy should monitor progress on the debates in the parliament during the budget session where items that were not mentioned in the budget would be debated. These will include debate on the GST reform, implementation of the land-acquisition bill and possible clarification of reforms introduced last year. 2. State Level Elections (March to December): While the general elections are to take place in 2014, there are eight state-elections that will take place in 2013. These elections should offer a good indication of the voters opinion of the two major parties; BJP and Congress. Of the eight, elections in Karnataka, Madhya Pradesh and Rajasthan will be crucial as they represent relatively larger number of seats in the lower house. 3. Dis-Investment in State Run Companies (April Onwards): With the dis-investment target being more than doubled this year to improve the countrys fiscal situation, the government needs to begin selling its stake in the public-companies as early as possible. The private sector should monitor the amount of money being raised through the sale as compared to targets, as the fiscal deficit is currently in a vulnerable condition. 4. Further Uncovering of Corruption Scandals (All of 2013): The Congress Party has faced several corruption scandals during its current tenure including the telecom-licenses debacle which cost the country US$40billion and major mismanagement of the Commonwealth Games. Uncovering of any new large corruption scandals against the Congress Party would have strong negative repercussions on their general elections of 2014.
1The Indian National Congress, commonly known as Congress, is currently the ruling

party and one of the two major political parties in India, the other being the Bharatiya Janata party (BJP). 2 A benefit given by the government to groups or individuals, usually in the form of a cash payment or tax reduction, that is considered to be in the interest of the public.
3 A fiscal deficit occurs when a government's total expenditures exceed the revenue that

it generates (excluding money from borrowings). It differs from debt, which is an accumulation of yearly deficits. Sources:
1. Union Budget 2013-14, Times of India, Economic Times, Frontier Strategy Group

5 Copyright 2012 SMU Economics Intelligence Club

The Ghost of Mao and Confucius behind the Internet Censorships in China
By Tan Kwan Hong, Singapore Management University
The Ghost of Mao In 1949, Mao announced the formation of the Peoples Republic of China, after decades of Civil War and unrest. Confident that he had finally gained the respect of his comrades and people throughout the country, Mao, in subsequent years tried to consult the Chinese people expecting at worst mild criticisms. But to his surprise, Mao and his policies were received with an outpouring of harsh criticisms. Mao became disappointed by the reactions to his policies, and decided to put an end to it by labeling them rightist1. This move led to the advent of the Anti-Rightist purge2, where anyone who were opposed to Maos views, be it comrades in the party or people in the farmlands, were purged. Mao did not care. Surrounded by yes-men, he was now free to pursue his own policies. Few in Maos party knew which direction he would lead the country towards. Maos love for movement and upheaval was evident from the way he behaved. Although it has been decades since Maos passing, the ghost of Mao still persists, at least in the online community. On the surface it seemed that the Chinese Communist Party was dominant, directing China confidently and with gusto - from her economic growth through the monetary system and Five Year Plans, to internet censorship policies, and the social media companies that manage these online channels - charting a new path to Chinese global dominance in the New World Order. However, deep inside the Chinese government lurked a profound sense of insecurity, reminiscent of the feelings that Mao had in the 1950s when he first tried to consult the people. The advent of the internet led to a loss of communicative control by the Chinese Government, making it very difficult for the party to manage a consistent and desirable identity in front of her 1.3 billion citizens, and a world that closely scrutinizes its every move. This sense of insecurity soon led to a pervasive system of internet control seldom seen in advanced countries, or even in Chinas East Asian counterparts. Such a move highlighted the inability of the Chinese Government to create an ecosystem in which to engage its people in peaceful public discourse on a wide variety of views. Such insecurity can be interpreted as having a lack of mutual trust in its people; the very same perception that Mao had decades ago. It is also due to this very insecurity that such blocking of sites and censorship occurred. Censorship was thought to be the easiest way out with the lowest transaction and administrative cost (in the economic sense) to operate, as opposed to the perceived opportunity costs of permitting public discourse which is far greater (due to the cost of risk undertaken through the alternative path of having more dialogues and open discussions of policies). The creation of the Chinese alternatives (Weibo, Ren Ren, QQ) to global social media sites like Facebook and Twitter effectively minimized political participation and interaction with foreigners, and Chinese nationals living overseas that might have a potentially different view to that of Chinas political elites. 6 Copyright 2012 SMU Economics Intelligence Club

So, did the specter of Mao really exist online? To a large extent, yes. The Chinese Government, in not wanting to suffer the same risk that Mao undertook, preferred instead to take a cautious stand. Such a choice stemmed from the fact that Asians, at their very heart, are still a society heavily influenced by Confucianism where citizens are not expected to out-rightly challenge the Emperor (now the government), who has the mandate to rule over the land. Although imperialism in China has ceased to exist, there remains an implied compliance by the Chinese citizens, where any outright challenge to the government is neither expected nor encouraged. This influence of Confucianism3 on many Asian societies is one of the reasons why authoritative governments have thrived in East Asian countries - think Jiang Jie Shi, General Park Chung Hee, and Lee Kuan Yew. The Ghost of Confucius And likewise, the ghost of Confucianism is also a reason why traditionally, Asian governments tend to struggle more when societal unrest occurs. This struggle stems from the lack of pro- activeness in stakeholder management, which is evident in the contrast between Western and Eastern government response to such situations. In Western democracies where liberty and rights to free speech are the norm and a high degree of compliance as preached by Confucius is not expected, non-governmental organizations and public activism are seen as part of the political architecture of the nation. Governments, prior to their election tend to be proactive in engaging these stakeholders (e.g. a politician who engages in actively garnering support and funds for their campaigns, years before the elections). It is also in such Western political platforms where the academic field of crisis and strategic communications is developed (an inherent Western concept to begin with), providing governments better methods to deal with these unrests. This example further indicates that players in these political platforms are more prepared than their East Asian counterparts when it comes to proactively dealing with social and political unrest. In contrast, East Asian governments, to a larger degree expect general compliance from the populace, and will tend to adopt a more passive approach to quell unrest. The main mechanisms they use are also primitive: harsh laws and regulations, an education system that encourages compliance with the law, and even adopting control over the mainstream media. Such tactics have existed for centuries, but do not work very well in the Internet age, where the loss of communicative control by governments and the mainstream media has become increasingly prevalent, and its effects widely felt. Despite technological advances that have helped perpetuate an arguably Western concept of individual rights to free speech, the Chinese government, still largely influenced by Confucianism expects almost absolute compliance from its people In conclusion, pervasive internet controls and censorship that are prevalent in China can be seen from two dominant angles: The Ghost of Mao (in terms of the CCP not wanting to repeat the mistake that Mao made in the past, and to risk losing mandate of the people) and The Ghost of Confucianism (in terms of expected compliance from its people, and suppressing platforms that encourage noncompliance). Such views are often overlooked by academics and analysts alike, but are crucial in identifying the often-overlooked insecurity and the lack of 7 Copyright 2012 SMU Economics Intelligence Club

trust that the Chinese Government still faces till today, behind the faade of her dominant appearance.
1 Rightists adopt a political stance that accepts or supports social hierarchy or social

inequality. Social hierarchy and social inequality is viewed by those affiliated with the Right as either inevitable, natural, normal, or desirable, whether it arises through traditional social differences or from competition in market economies.
2 The Anti-Rightist Movement, which lasted from roughly 1957 to 1959, consisted of a

series of campaigns to purge alleged "rightists" within the Communist Party of China (CPC) and abroad.
3 The system of ethics, education, and statesmanship taught by Confucius and his

disciples, stressing love for humanity, ancestor worship, reverence for parents, and harmony in thought and conduct.

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ASEANs Economic Integration: Looking at the EU, Should the ASEAN Region Integrate Faster and Further? (Part 2)
By Ng Yongxiang, Singapore Management University
Previously, Yongxiang provided an overview of ASEANs and EUs integration histories. In this issue, he delves deeper to examine the EU regions integration history to draw conclusions for ASEAN The Initiative for ASEAN Integration (IAI) was drawn up in 2000 to narrow the development gap1, particularly between the ASEAN-6 and CLMV. This initiative focuses on four areas of priority, namely infrastructure development, human resource development, information and communications technology, and promoting regional economic integration in the CLMV countries to help achieve the vision of the AEC. The major problem with this initiative is the lack of funding and the withdrawal of ambitious pledges. Lack of political will to ensure successful implementations of strategies is also amongst the issue that plague ASEAN. The EU experienced similar economic divergence in its member states during the mid-stages of integration but the gap was greatly reduced with deliberate and concerted efforts, as well as the effective use of policy tools including that of the structural funds. At the national level, there is considerable difference in the tariff1 structure. Excluding Singapore, the tariff structures of other countries by sectors vary prominently. Figure 2: Tariffs of ASEAN Countries by Sectors

Source: Urata and Kiyota (2005: Table 7.4, p. 228).

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Tariffs tend to be insignificant in the electronic equipment and general machinery industries, signalling a comparative advantage in these sectors. For an ACU to be successfully introduced, the diversity in tariff structures must be harmonized. Other issues that could potentially act as deterrence include the pooling of sovereignty over their own commercial policies, fiscal shock for some countries and the collection of revenue from the CET. An ACU is currently not tabled by ASEAN but I emphasize the need for it to be implemented in tandem with the goal of achieving a common market. The benefits are summarized in the next paragraph. Firstly, similar to the creation of a single market in EU, ASEAN stands to yield larger benefits than the EU with its heterogeneous economies and development gaps. Secondly, most efficient practices are allowed to develop in various areas of microeconomic policies especially in CLMV. Thirdly, ASEAN would be more attractive to foreign direct investment. This is opposed to the higher transaction costs faced by multi-national corporations when doing business within the AFTA. Lastly, ASEAN could take on a united front at international forums such as the WTO, just as the EU had in projecting its interests in such organizations. Looking beyond the current goals set by ASEAN, the final stage of economic integration would be the economic union. This requires an agreement among ASEAN nations to transfer economic sovereignty to a supranational authority, unifying national monetary policies and accepting a common currency. The Maastricht Treaty2 signed in 1991 by the heads of governments in the EU specified that the respective countrys economic performance have to be similar. This convergence criterion, as mandated by the treaty, includes price stability, low long-term interest rates, stable exchange rates and sound public finances. Furthermore, the theory of optimal currency areas concludes that the countries involved should be exposed to common and symmetric shocks. As mentioned earlier, the diversity in economic development results in asymmetric shocks and possibly asymmetric responses due to incompatible financial markets. The trade-offs involved would be loss of domestic monetary policy flexibility and the inability to use inflation to reduce public debt in real terms. The recent Eurozone crisis could be attributed to the adoption of the euro. The sharp fall in lending rates led to a significant increase in consumer lending and much of it was channelled into the real estate bubble. Henceforth, the costs of integrating further into an ASEAN economic union far outweigh the benefits of exchange-rate stability and low interest rates. The history of EUs regional economic integration does support ASEAN integration. EU has experienced the general factors that hinder the progress of integration for ASEAN. The objective of an AEC has been pushed forward from 2020 to 2015. This clearly indicates that ASEAN is integrating faster and beyond the CEPT-AFTA. However, the outline for the AEC does not include a customs union. In this regard, ASEAN should seriously consider the formation of an ACU if it intends to integrate further. The problem of the development gap is not merely an obstacle in the process of integrating, but a prerequisite if ASEAN truly intends to follow in the steps of the EU.

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1 A tariff is either a tax on imports or exports (an international trade tariff), or a list of

prices for such things as rail service, bus routes, and electrical usage (electrical tariff, etc.). 2 The Maastricht Treaty or the Treaty on European Union was signed on 7 February 1992 by the members of the European Community in Maastricht, Netherlands. Sources:

1. Bacha, O. I. (2008). A common currency area in ASEAN? Issues and feasibility. Applied Economics, 40, (515-529) 2. Bui, T. G. (Aug, 2008). Development Gaps in ASEAN as Crucial Nontraditional Security Issue: A 4-I Approach. Consortium of Non-Traditional Security Studies in Asia. 3. Plummer, M. (Nov, 2006). An ASEAN custom union? Journal of Asian Economics, 17 (5), (923-938). 4. Thangavelu, S. M. and Chongvilavan, A. (Sep, 2009). Free Trade Agreements, Regional Integration and Growth in ASEAN. 5. Tjhiong, R. (March, 2002). Forging an Economic Integration: The Case of ASEAN.

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The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large- cap common stocks actively traded in the United States. It has been widely regarded as a gauge for the large cap US equities market The MSCI Asia ex Japan Index is a free float-adjusted market capitalization index consisting of 10 developed and emerging market country indices: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. The STOXX Europe 600 Index is regarded as a benchmark for European equity markets. It represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

Correspondents : Vera Soh (Vice President, Publication) vera.soh.2011@economics.smu.edu.sg Singapore Management University Singapore Samuel Ong (Publications Director/ Editor) samuel.ong.2010@business.smu.edu.sg Singapore Management University Singapore Ng Yongxiang (Marketing Deputy / Writer) yx.ng.2011@accountancy.smu.edu.sg Singapore Management University Singapore Tan Kwan Hong (Writer) Undergraduate School of Economics Singapore Management University kwanhongtan.2009@economics.smu.edu.sg

Ng Jia Wei (Vice President, Operations) jiawei.ng.2012@economics.smu.edu.sg Singapore Management University Singapore Yingyu Zeng (Liaison Officer) yingyu.zeng.2010@economics.smu.edu.sg Singapore Management University Singapore Darren Goh Xian Yong (Editor) darren.goh.2010@business.smu.edu.sg Singapore Management University Singapore Mrigank Kanoi (Writer) Undergraduate Lee Kong Chian School of Business Singapore Management University mrigankk.2009@business.smu.edu.sg

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