On many measures, India looks very similar today to China around the start of the millennium. How many investors kick themselves for failing to appreciate China’s potential early enough? How many wish they’d captured more of those China-related returns?
A large part of China’s explosive growth can be attributed to its accession to the World Trade Organisation in 2001, at a time when new technology was enabling the exponential globalisation of supply chains.
But India had been a member since 1995 and didn’t reap the same rewards. The difference was a Chinese regime obsessed with facilitating investment – Zhu Rongji’s banking reforms of the late ‘90s; centrally coordinated industrial strategies; streamlining and simplification of taxation and regulation; Meanwhile, India’s bureaucratic sclerosis resigned the nation to chronic underinvestment.
Now that Prime Minister Narendra Modi’s government looks more poised to break free from his country’s administrative lassitude, India may be about to play catch-up. We believe the Goods & Services Tax adopted on 1st July, which nullified the previously unnavigable jungle of local taxation, was an important reform milestone.
The following five points highlight why India’s potential might supersede that of China.
Demographics and human capital
India’s working age population today is equivalent to China’s in 2000, but thanks to more favourable demographics it is set to surpass China’s by 2025. India’s graduate population is much larger than China’s was in 2000 - so there’s less scope for catch-up there - but it has a much lower literacy rate suggesting potential gains from secondary education.
India has just one-third the land mass of China, but already has three-quarters the roads and half the rail tracks. Still, much of India's capital stock is old and there's plenty of investment needed; it just might use fewer heavy materials than China’s boom. Capital formation in India today is on a par with China's in 2000, which went on to increase 5-fold. If India encourages research and development, we might see a similar explosion in patents and intellectual property.
Inward and outward foreign direct investment
India isn't the most open of economies when it comes to foreign investment, but neither was China in 2000, and yet inward foreign direct investment increased from $40 billion to $250 billion a year by 2015.
Similarly, China went from making no investment abroad to making nearly $200 billion a year - if India does the same that could mean significant M&A to spur Western markets. Effective domestic and foreign investment could enable India’s productivity to break out, as China’s did in the early 2000s.
Share of global trade and national savings
India's propensity to invest abroad will depend on national savings, much of which will be earned through trade. At less than 2 per cent, India’s share of global manufacturing exports is astonishingly small, but with much higher relative wages than China had in 2000, it’s unlikely to follow China’s path. Services exports are another matter, however.
Services are less susceptible to Western threats of protectionism and there is no dominant emerging market player in the sector (China has not grown its share at all this millennium). India’s reserves and annual gross domestic savings are of a similar size to China’s in 2000, which went on to increase by almost $3 trillion and $5 trillion, respectively.
India’s level of household consumption is higher today than China’s was 17 years ago, but it could still increase by trillions over the next ten years (remember those more favourable demographics). Internet trends are notably nascent with just over one broadband subscription per 100 people – in 2015 China had almost 20 subscriptions per 100 people.
With banking and monetary reform, there is plenty of scope for financial deepening, but household leverage (relative to income or assets) at 27 per cent is nowhere near as low as China’s in 2000, which was only 11 per cent.
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