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Investors are currently infatuated with China, says Simon Wilson. But, long term, India may be a better bet.
How fast is India growing?
Very fast indeed. GDP grew 8.2% in 2004 - that’s three times the UK’s growth rate of 2.8% and only slightly less than China’s 9.5%. Currently, India’s economy is still overwhelmingly based on high-cost agricultural production. But the country has the potential to grow fast for decades as the expanding middle class (already more than 200 million people) boosts and sustains domestic demand. According to Goldman Sachs, India’s growth rate is likely to outstrip China’s within ten years.The bank forecasts average growth of 5% a year over the next 50 years for India, but thinks China’s growth will drop below 5% around 2020. It also predicts that India will be the third-biggest economy in the world by the early 2030s, overtaking Britain in around 2022 and Japan by 2032.
What’s driving the growth?
Fifteen years of deregulation, free (or at least freer) trade, and the spectacular success of the services sector. From independence until the end of the 1980s, India was highly protectionist in its economic policies. Starting with Nehru, successive governments pursued ‘swadeshi’ - a kind of socialist self-reliance based on central planning, layers of bureaucratic controls, and an aversion to foreign investment. But from 1991, India embraced free trade and market-based reform - with spectacular results. In the second half of the decade, growth averaged 7%.
What about offshoring?
The services sector - boosted by large numbers of hardworking, English-speaking graduates - has become a world-beater in attracting Western firms eager to cut costs by ‘offshoring’ support functions. To start with, the boom in outsourcing to India - which is growing at between 30% and 40% a year - involved simple stuff, such as call centres and straightforward computer-code writing. But Indian workers are rapidly getting more sophisticated. Bangalore, for example, is the site of cutting-edge research for firms such as General Electric, Pfizer and AstraZeneca. More than 75% of IT services outside the US are now sourced from India.
How does India compare with China?
In the early 1980s, China and India each had annual output per head of about $500. Today, China is twice as rich: gross national income was $1,100 in 2003, compared to India’s $530. India notched up impressive annual growth of 5.9% from 1993-2003, but China raced ahead at 9%. That is partly because China started its market reforms ten years earlier, in 1979; partly because it’s been very successful at attracting foreign direct investment; and partly because manufacturing things (China’s strength) makes up a much bigger slice of the world economy than services (India’s strength). According to Morgan Stanley, global merchandisable trade is worth some US$14.9trn a year, more than four times global services at $3.6trn.
So why invest in India, not China?
Three core reasons: a more favourable demographic profile (in a country of more than a billion people, 600 million are under 25); a greater capacity for technological innovation; and Western-style democratic and legal institutions. Daniel Lian, a Morgan Stanley economist, argues that China’s lead in manufacturing (based on low wages and a large, high-quality, labour pool) is highly vulnerable to Indian competition. This is especially the case given that India’s ability better to protect intellectual property rights may let it offer similar low wages yet climb the value chain more rapidly. In addition, China’s rapid ascent in the past quarter century could well be threatened by increased geopolitical rivalry with the West, limiting growth. By contrast, India, with its Western-style democracy and elites, appears to be better positioned as a natural strategic partner.
How is the stockmarket doing?
Last year was a bit of a roller coaster: markets slid after the Congress party’s unforeseen election success, but have recovered strongly since Manmohan Singh took the reins as PM in June. As finance minister, Singh was the driving-force behind the economic liberalisation of the early 1990s, and is seen as apro-business safe pair of hands. The Mumbai Sensex 30, India’s main blue-chip index, has jumped 18% in the last 12 months and 90% over the past three years, hitting a fresh all-time high last month. And according to research from Standard Life Investments, India’s long rise means its stockmarket could deliver average 10% returns for decades to come.
How can I invest? Fidelity offers a relatively new India Focus fund of around 50 to 75 stocks, while Aberdeen has a more concentrated fund of just 25 firms, the India Opportunities. Aberdeen also offers an investment trust, the New India, while JP Morgan Fleming’s Indian Securities trust is the best performer of the lot, up 134% over the last three years
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