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Published: November 2, 2010
A recent article in
The Economist caught my eye, and a particular statistic I
found interesting was that until 1800, China and India accounted
for about half of the global economy. The Industrial Revolution
in the late 1700s shifted the balance of power to Britain and
Western economies for more than 200 years, but growth trends
appear to be shifting again.
Out of all emerging markets, China garners a significant share
of the press. This is certainly justified; its economy recently
overtook Japan as the second largest in the world and has
averaged +10% annual growth for about three decades now. Its
population of 1.3 billion highly literate, motivated individuals
is certainly nothing to sneeze at and represents one of the
largest groups of burgeoning consumers in history.
There are many other impressive data points to prove that China
is a great place to invest, but it may not be the best emerging
economy to invest in. That title may very well go to India.
There are three primary reasons why India could outperform its
neighbor and emerging market archrival going forward.
The first is demographic. India has one of the youngest
workforces in the world. More than 30% of its population is
under 14 years of age, and more than 64% is between the ages of
15 and 64. An investment bank estimated that its working force
will increase by 136 million people by 2020. In contrast, it
estimates China's will grow by only 23 million during this
period.
Overall, China's population is
growing slowly, at less than +1% per year, and the median age is
over 35. India's is growing by +1.4%, and its median age is
under 26. India's total current population is 1.2 billion, not
far behind China's in terms of a massive and growing consumer
market.
The next reason is perhaps the most obvious: India is a
democracy. China's state-run government has clearly encouraged
economic growth for many decades now. The government is
streamlined to where decisions can be made quickly, and its
leaders have a reputation for making rational decisions that
have had a profound positive impact on the country. India's
complicated democratic system has arguably held back its growth,
but in actuality, it favors investors.
This is because democracy has allowed India's private companies
to flourish. Companies such as such as information technology
provider Wipro (NYSE: WIT) and Tata Motors (NYSE: TTM),
India's emerging car manufacturing powerhouse, have grown
competitive on a global scale because they have been allowed the
freedom to compete on their own right. In contrast, China's
largest firms operate somewhere between the public and private
realms, receiving government capital and other input from
politicians on how to run their businesses. With government
intervention, the market is not always determining where it is
best to invest. And not efficiently allocating capital could
come back to haunt China in the future.
The last point has partly to do with India's democracy -- in
that it has a helped create a highly entrepreneurial culture.
Its democratic institutions and English-speaking emphasis have
linked it inextricably with pro-business economies such as the
United States and the United Kingdom. Evidence of this includes
a global leadership position in information-technology (IT)
outsourcing, thanks to firms such as Wipro, Infosys (Nasdaq:
INFY) and others; and a $2,000 car, courtesy of Tata, as
well as frequent travel among investors between these regions.
Right now, China's economy is four times as large as India's.
This speaks to China's success, but it also means India has a
good chance of being able to grow faster from its smaller base.
A number of market forecasters predict that India will indeed
outgrow China going forward, given the factors cited above and
that it has strong domestic demand, whereas China's economy is
export-focused and could run into trouble, similar to the way
Japan has in recent years.
Action to Take --->
Perhaps the most prudent course of action would be to hedge your
bets and find ways to invest in both India and China. Overall
though, many investors are probably overweighted in China and
should definitely add leading Indian firms to their global
shopping lists, if they haven't already. Those looking for
broad-based exposure to India should consider the PowerShares
India ETF (NYSE: PIN), which has a diverse set of Indian
holdings.
-- Ryan Fuhrmann
Contributor
StreetAuthority
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