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India-China: Another View

April 24th, 2004 · No Comments

[via Reuben] The Daily Reckoning has an article by Lynn Carpenter presenting a different view of India in contrast to China (you need to scroll down on the page to read the article):

I’ve been looking at both countries, and here’s what I think. India’s not the next China. Not yet. Both countries have many risks, but China’s emergence has a momentum and key support that India’s does not.

So far, the major business model for the more highly touted Indian companies is: copy what’s done in the U.S., do it cheaper, and ship it back to us. Innovation and R&D spending are not robust. But journalists touting India seem to be unaware of a fatal flaw in that plan. Not only are the profits to be made selling cheap substitutes limited, but it’s a plan all India’s fellow emerging economies can copy. Taiwan and South Korea are already cutting into the world IT market.

I’d rather find a sound business engaged in a more sustainable market: capitalizing on the boom at home. A good example of this is Sina.com or Sohu.com, the Chinese Internet companies. Or CHINA UNICOM, the telecommunications company that is gaining subscribers at home by the millions, not to mention subscribers in nearby countries. They’re not value investments today, but they are sound businesses.

And Indian companies on these models? They’re in short supply, and overpriced, too. That’s because India’s internal progress still has far to go. India’s GDP may be rising on exports, but it is not advancing on consumer spending at home.

Quite simply…India has been on the brink of ’emerging’ and becoming a world force about 40 times in the last 20 years. OK, I exaggerate, about once every two or three years. But it never quite sticks. It’s not trustworthy yet. India has not yet gathered China’s momentum. Or, as they say these days, it hasn’t reached the tipping point.

India is still a story about billions of people hungering to advance. That’s a spurious argument. It applies to Africa as well. Wishes are not ability. What’s more, the problems facing India are just as large as, if not larger than, China’s.

China has heavily indebted banks and high unemployment in its western provinces. India has high unemployment across the country, but a much more advanced banking culture, which would seem to give it an edge in the business world. But it hasn’t worked that way.

China, as a communist country, set upon a course to educate and employ all its population. It came at too high a cost to sustain, but it left a country where everyone had a taste of success for a while and an entire generation of well-educated students.

That never happened in India. Despite progress against poverty in the 1980s, the trend began reversing again during the early ’90s, when inflation hit India. In the 1991 census, 38% of India’s population was again below the poverty line. Not only are millions of adults illiterate, but so are millions of children.

This creates a spiraling vicious cycle for India. It needs progress so that it can afford to aid its own people. But with so many of its people poor and untrainable, it is hard to make that progress. India’s largest industry is agriculture. Textiles come second. The vaunted IT sector we hear so much about is a mere 3% of the economy.

The IMF recently warned that India’s GDP growth this year is likely to be less than last year…and that it will not meet its target 8% growth rate over the next several years without major repairs to the physical and social infrastructure. It needs roads, railroads, telecommunications, training and education to proceed. It must make daunting improvements within the country – in poverty, literacy, energy and free access to improvement for citizens below its small privileged class.

But the government is strapped. Its deficit comes to 10% of the GDP (the United States’ current record deficit is roughly 5% of GDP). Its cumulative national debt equals 80% of annual GDP. But when it comes to privatization, the engine for progress and Western investment, India still has strong, powerful resistance from farmers and labor trade unions.

India’s lack of buying power at the ground level where consumers live is astounding. Partly that’s the result of its attempt to leapfrog from an agricultural economy to a service economy – a model that excludes most of the population. The true path to successful development wends its way through industrialization first. It comes with higher rates of education, literacy and health. And it comes with heightened confidence on the part of large international investors – as represented by foreign direct investment.

Until the big boys put their money down, it’s not safe for small retail investors to get in on the game. Foreign direct investment to India just barely nudged up to $6.7 billion last year. That’s about what flows to Poland or Portugal…though admittedly, it’s a great increase from the $2 billion or less of prior years.

If you’re determined to catch a mainstream trend, catch the China wave rather than India’s. As an investment, I still much prefer China. An impressive portion of China’s growth is coming from industrialization and consumer products with both domestic and international appeal.

Tags: Emerging Markets

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