Recently in an article “Forget China” it was noted that “India is up 11.2% while China is down 20.6%” in 2010. The graph from the article:
In similar vein Robert Parker, Senior Advisor of Credit Suisse in The Economic Times, a publication of The Times of India, says in a recent interview,
“ They [Foreign Investors] are looking at India versus other markets, most notably comparing India with China and Brazil as the two other major emerging markets. Obviously this year we have seen a significant out-performance by India and if we look at for example India versus China, India is up 33% versus China.”
China and India (collectively “Chindia”), are both very old civilizations. The two most populous nations have challenging tasks to improve the economic well being of a large poor majority. Many international investors compare China and India hoping to find a long term pattern for investing insights. This article discusses divergent approaches followed by China and India from a larger perspective.
Bottoms up versus top down
India is a bottoms up story, while China is a more top down story. GDP figures can hide more than they reveal, nonetheless provide useful pointers. GDP growth rate in China has been driven by centrally commanded infrastructure spending, while the Indian GDP growth is driven by robust domestic aggregate non-commanded demand fueled by rising incomes. An additional interesting factor is that the India growth story is driven by rural and non-main urban centers, a factor which will be explored in this article subsequently.
The Indian growth process is chaotic with a garrulous democracy arguably slowing down progress. The Chinese growth story appears orderly and disciplined – the country resembling a well run machine. To quote from an article Contest of the Century in The Economist,
“Autocrats in Beijing are contemptuous of India for its messy, indecisive democracy. But they must see it as a serious long-term rival—especially if it continues to tilt towards America.”
Hard versus Soft Infrastructure
India’s abysmal public infrastructure is legendary – chaotic road conditions, city sprawl, urban slums, poor ports, a bureaucracy which is many times at odds with larger interest of India, and corruption in public departments which makes one wonder how the country functions.
China on the other hand has excellent infrastructure in urban areas, good roads, public transportation, a state of the art train system - and is arguably the lowest cost manufacturing super power.
However in soft infrastructure India seems to be far ahead of China. India has a fiercely independent free press; some say it is lacking self-restraint as was tragically demonstrated in Mumbai terror attacks. India has a much vaunted, independent judicial system, which is overloaded and non-biased, though slow. The country has rule of law. The banking infrastructure is robust and has not suffered the credit squeeze meltdown contagion of the developed economies.
Most importantly India is a free, open society with transparent information flow. It has wildly varying ethnicity, sub cultures, religions, foods habits and languages. Consensus on any issue is extremely difficult, but once achieved gets deeply rooted, becomes persistent, and is taken for granted. Democracy is one such given, although it has experienced many communal strong head winds to the point of being almost broken down at times.
There are other areas where a broad consensus has emerged – mainly that, “financial inclusion” of poor and rural people are crucial to long term growth. Education and empowerment of women have been recognized as enablers to make this happen.
Interestingly women self-help groups [SHGs] have become pervasive in rural and non-main urban centers. Fueled by micro finance institutions, these groups have become extremely successful in becoming transformational agents. The success of SHGs has not gone unnoticed. Financial inclusion and SHGs are no longer buzz words – both are now on the radar of main stream financial and economic institutions.
In a December 2009 the Reserve Bank of India [RBI] report, “Financial Inclusion : Challenges and Opportunities”, Duvvuri Subbarao, Governor of the Reserve Bank of India points out that
“Financial inclusion is a necessary condition for sustaining equitable growth. There are few, if any, instances of an economy transiting from an agrarian system to a post-industrial modern society without broad-based financial inclusion.”
He further points out major benefit at the macroeconomic level by lowering transaction costs, allowing Government to make social security payments without leakages (read public officials corruption):
“There are enormous benefits at the aggregate level too. The first and more obvious benefit is that financial inclusion provides an avenue for bringing the savings of the poor into the formal financial intermediation system and channel them into investment. Second, the large number of low cost deposits will offer banks an opportunity to reduce their dependence on bulk deposits and help them to better manage both liquidity risks and asset-liability mismatches.”
“It is for the banks to convert what they see as a dead-weight obligation into an exciting opportunity and move aggressively on financial inclusion”.
Main stream banks, noticeably lead by State Bank of India, have started strengthening their micro finance credit delivery infrastructure especially for women SHGs. Other banks, including private sector banks, are reportedly finalizing their own micro-finance strategies.
As the RBI report points out, establishing such processes should smooth out the transition from what is basically an agrarian economy to a modern industrial one.
Robust Private Sector
India has robust private sector comprising both indigenous and foreign companies which compete and learn from each other. India is fueled by large educated work force, a robust aggregate demand – which many foreign companies now call home.
India seems to have a non-manufacturing bias towards developing high end skills. It is no wonder that many companies have their development centers in India – a trend which started in early 90s by General Electric and Texas Instruments. It is relatively easy, compared to China, for foreign companies to set up “bump-less” development centers in India working interoperably with their counterparts elsewhere.
Interestingly, Huawei, a Chinese telecommunications giant has its largest R&D center outside China in Bangalore, India. The center employs 2,000 people.
China on the other hand has concentrated on being a low cost manufacturer. But the situation is changing rapidly with India transforming itself into the largest small car manufacturer hub while China is catching up on soft skills.
Space Sector: Indian Space Research Organization [ISRO]
ISRO, in partnership with private and public sectors and other western space agencies including NASA, seems to be doing extremely well. It has the lowest cost platforms for putting multiple satellites in orbit. The fallout of this on private and public sectors has been positive, increasing the depth and breadth in a broad spectrum of engineering, communications and computing technology skills.
Here is a story which seems to excite both indigenous and foreign corporate India.
In a recent article in Wall Street Journal article, Sanjeev Chadha, chairman and CEO of PepsiCo India, says that PepsiCo has “symbiotic relationship with thousands of farmers across India”. As this article, “MNCs in Rural India: At a Turning Point” observes,
“The big reason for the growth is that India’s rural consumers are steadily gaining more spending power. The number of rural households earning less than US$760 a year is down from 65% to 24% since 1993, while those with an income of US$1,525 have more than doubled from 22% to 46%. Combine these factors with improved roads and other infrastructure in rural India to help products reach their markets, and it’s easy to see rural India’s attraction.”
Almost every company is working on a strategy to tap this rural market.
Impact on Stock Markets
Indian stock valuations are believed by many to be rich and running ahead of fundamentals. Others believe that rich valuations are justified because of long term earning potential and are advising “buy”. There seems to be a growing chorus, noticeably from foreign investors, who are starting to believe that India may be better investment story than China.
The Speed Bumps for India
Soft infrastructure is no substitute for hard infrastructure. Massive investments are needed in goods and passenger transportation; agricultural productivity needs improvement to feed its growing population; and long term water management strategy needs to be formulated and implemented to decouple agriculture from the often erratic monsoon. Removal of chronic power shortages, wide spread corruption in public offices, and avoiding environmental degradation are few of the many factors needed to ensure sustainable development and growth.
Final Word: Political View of Chindia
The West, Japan and India admire China’s success in manufacturing but are increasingly becoming wary of China for what is perceived as a bullying approach to international politics.
India, on the other hand, is viewed more benignly, although the public image is that of a shoddy and bumbling nation which manages to muddles through. However there is admiration for its democracy, its potentially large market potential, a belief that it is an economic workhorse in the making, and possibly a more reliable trading partner than China.
A recent article by Michael Pettis in Seeking Alpha, examines the economic conundrum facing China:
“So how will China rebalance? Unfortunately there is no obvious answer…. This is as much or more a political issue as it is economic…”
By comparison, in India a broad political consensus exists on how to develop the economy.
Both China and India face similar problems, but have chosen absolutely diverse solutions. It is difficult to predict which approach is better at producing long term sustainable growth and poverty reduction without causing large social disruptions.