Indian Tiger Trumps Chinese Dragon
Carl Delfeld, Chartwell
31July 2006
India has the potential to be the next great bull market of the 21st century, one which I believe will be a better investment opportunity than even China.
Like China, India was stuck with a failed economic system for over 50 years. The bureaucratic, socialistic state fostered weak growth by stifling entrepreneurship and initiative. Famines, lack of investment and poverty were the result.
But in the early 1990s, the country changed course and started to open up its economy to the world. Tariffs and import quotas were slashed, and exports now grow at a 20% annual rate. Personal marginal tax rates were cut from 50% to less than 30%. The banking system has improved greatly, with non-performing loans have dropping to less than 4% of total bank loans. It has accumulated reserves of $135 billion in foreign exchange.
Here are six reasons why India should prove a more fertile place to invest than China, and why investors should consider committing more of their capital to the subcontinent.
1. Unlike China, India is a functioning democracy with respect for property rights and the rule of law. China's authoritarian state may have the advantage at making quicker decisions and pushing through economic reforms, but without democratic political reform, it will eventually hit a speed bump the size of the Great Wall. India's multi-party parliamentary system with its obstructionist bureaucracy is far from ideal, but at least the daily speed bumps on the road to market reform can be overcome.
2. India is a natural ally of the U.S. It is now emerging on the global stage and playing classic balance of power politics. America's relationship with China will at best be wary and tense. The fact that many Indian citizens speak English is also a significant advantage both commercially and politically.
3. China's state-owned companies have staying power, but government ownership will limit their growth and potential. Foreign governments will be suspicious of their intentions and likely consider them as an extension of the Chinese government. State ownership will also lead to inefficiencies and an inability to hold onto top management talent.
4. India's capital markets are better than China's. India's stock market was established in 1870 and has 6,000 publicly-traded companies and a more modern financial and banking system that allocates capital fairly well. Only 10% of bank credit in China goes to private companies. India has 100 companies with a market cap over $1 billion.
5. India is a very youthful nation, with 50% of its population under 25 years of age. This leads to less strain on its national budget, and also brings hope that the younger generation will drag the bureaucracy and politicians to implement market reforms more swiftly. China's one-child policy has backfired, leading to an aging population which will lead to manpower shortages and tremendous pressure on its national budget. Twenty percent of Shanghai residents are over 60 years old and by 2020, one-third of Shanghai's population of 13.5 million will be over 60.
6. India has a more balanced and sustainable economy. Nearly two-thirds (64%) of its GDP is attributable to consumer spending and 50% of its GDP comes from the service sector. China's economy is more dependent on foreign investment, exports and resources. India's 250 million people living in poverty is a tragedy but the Indian middle class has quadrupled during the past two decades to reach 250 million as well.
India presents investors with the opportunity of a lifetime and its democratic government, stronger financial system, market-based interest rates and history of respecting property and intellectual rights make it a better long-term play than China.
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