02-Aug-2005

>India: Finally recognized

Asia: the best bet for businesses

Asia remains one of the world's most dynamic regions and offers multiple opportunities for businesses and investors. In addition to the considerable enthusiasm that has been directed toward China as a result of its rapid growth in recent years, considerable attention is now being accorded to India and other markets as well. Economic progress is also fueling increasing regional integration, which in turn is further accentuating Asia's potential.

Asia grew at an impressive 7.3% in 2004, according to the Asian Development Bank's 2005 Outlook report. In fact, 2004 marked the region's "best growth performance since the Asian financial crisis of 1997-98". First-quarter 2005 data supports the view the region remains on an upward trend. India grew at a 7% rate while Malaysia registered 5.7% growth over the same period. For its part, Japan registered 5.3% during the first three months of 2005. This success in part is attributable to solid growth in traditional trading partners such as the US. At the same time, the region is benefiting from rising domestic consumption, business investment and intraregional trade. Looking forward, some analysts are questioning whether this growth is sustainable. In addition to stagnant growth in Europe, Asian economies have to grapple with the potential of lower growth in China and the US.

Asia's fundamental strength was recently emphasized by Morgan Stanley Chief Economist Stephen Roach who noted "any hit to Asian growth seems likely to be cyclical and temporary". Reasons for optimism were enumerated in a recent Far Eastern Economic Review article by editor-in-chief of the China Economic Quarterly, Joe Studwell, who highlighted better corporate governance, Asia's enlarging role in global supply chains, the strong financial positions of many regional economies, Asia's growing role as a center for innovation, and an expanding middle class. Paradoxically, portfolio investors have traditionally underweighted the region. In 2003, Marc Faber observed Asia, including Japan, accounted for only 11% of world equity market capitalization. This allows substantial room for valuation increases as this deficiency is addressed.

India: Finally recognized
While much of the interest directed toward Asia in recent years can be attributed to rapid development in China, we are now beginning to see a similar enthusiasm emerge in regard to India. Many analysts believe, in fact, that India's strong devotion to democratic rule, its emphasis on service industries, long-term familiarity with Anglo-Saxon business practices, knowledge of English and more favorable demographic structure make it an even more favorable market over the long term than China. Over the last three years, the economy of India has grown at an average rate of 6.5%. According to Deputy Chairman of India's Planning Commission, Montek Singh Ahluwalia, the country is expected to average 7.5% over the next two years, with an objective of seeing it rise to an 8% growth path thereafter.

India undoubtedly still requires numerous additional structural and other reforms as well as substantial infrastructure improvements to sustain its progress. The lower baseline from which it is starting, however, allows investors and businesses a major opportunity for growth and entry into an extremely promising market as it begins to open its doors more seriously to foreign investment and participation.

Recognizing the emerging potential of the Indian economy, Japanese firms have been moving to strengthen their presence on the subcontinent. Similarly, Indian firms are increasingly looking to Japan as an export market. As a result, the governments of Japan and India have moved to form a Joint Study Group, with the goal of establishing a comprehensive economic relationship, most likely including a Free Trade Agreement (FTA) between the two nations. At the first meeting of the study group this month, it was agreed that a report would be submitted to the two prime ministers by June 2006.


Despite these challenges, Japan's Ministry of Economy, Trade, and Industry (METI) estimates that by 2020, Asia will have a 25.5% share of world GDP (gross domestic product) versus 19.3% in 1990. Consumption is rising, with polling firm ACNielsen reporting Asian consumers are far more confident about 2005 than those in America and Europe.

While US and European managers and investors have long recognized Asia's ability to produce cheaply manufactured export products, the region is now seen as a huge market for commodities and, increasingly, consumer goods. Less widely appreciated is that Asia is quickly becoming a hub for advanced R&D (research and development), as well as design, production, and test-marketing of higher-end products such as automobiles, consumer electronics and a range of technological applications and services. Asian governments are supporting these trends by investing in education and infrastructure, offering favorable tax and regulatory treatment, and reducing tariffs and other barriers. These measures, as well as Asia's underlying attractiveness, are helping to facilitate record numbers of cross-border transactions as well as rising trade and investment flows into the region.

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