Friday, December 15, 2017

Investment News and Commentary from Emerging Markets in Asia - China, India and ASEAN

About discusses business and investment news rising from the geopolitical relations of China and India, and the interactions these two countries have with the rest of emerging Asia.

India’s Opportunities Lie Behind China’s Shadow

Shankar Acharya’s article in the Financial Times is an interesting piece and showcases once again the differences between China and India. Acharya, himself a former chief economist and advisor to the government of India, should know, and his recent book “India and Global Crisis” is a well-respected treatise on how the global downturn is affecting India.

The article makes interesting observations between China and India as they have developed over the past twenty years. Quite correctly, he points out that from a 1970’s base when both economies were at an essential parity, China has now raced ahead. The World Bank statistics he provides give us good reason to pause and marvel at the differences between the two nations.

Here’s a look at China and India figures:

Average per capita income (2007) , in actual purchasing power parity: China-US$5,250; India–US$2,350

Female adult literacy (%): China– 85; India-47

Under five infant mortality rate (per 1000): China – 20; India – 65

Poverty ratio of those living under US$1.25 per day (%): China – 17; India – 41

Merchandise exports (US$billion) China, 2000: 280 billion; 2007: 1,200 billion; India, 2000: 30 billion; 2007: 150 billion

Current account balance: (US$billion) China, 2000:1billion;2007:325 billion; India,2000:-5billion; 2007: -11 billion

Foreign direct investment (US$billion) China, 2000: 170 billion, 2007: 325 billion; India,2000: 1billion;2007:100 billion

Acharya’s article, based upon the rapid growth that China has seen over the past fifteen years, essentially showcases the dynamic growth that China has had, almost to the detriment of India, which is perceived as a laggard based purely on these indicators. He goes on to explain a variety of differences between the two nations, but only in the final paragraph comes to his real point, “had both these populous Asian countries embarked upon growth of 8-10 per cent a year at roughly the same time, it could have been far more challenging for the international economic order – and perhaps far more dangerous.”

It’s an interesting observation, albeit one yet again crowded with a now seemingly inevitable economic overview of how far ahead of India China really is. Yet for me, that’s the entire point. If we recall the Tiananmen incident of 1989, China had been enjoying a mini boom at the time. India was about equal in almost every way, but three things occurred, and one that would happen later to India, that dictated development.

For China, the nation had just woken up to the fact that its energy supply was two weeks away from completely running out. Deng Xiaoping was furious at the state controlled system that managed its energy and borrowed internationally to tide China over the crisis. Afterwards he began an immediate reform of the Soviet inherited system to bring in Western expertise to develop the nation.

China’s energy crisis would have seen the collapse of the Communist Party, and the fragmentation of the nation and it was during this time that the collapse of the USSR still weighed heavily in the minds of the Chinese leadership. It is no coincidence then that some of China’s first joint ventures were in the energy sector, including early Dezan Shira & Associates clients who drilled offshore for oil in the South China Sea.

At this same time, the Indian government, still muddling along after the departure of the British, had based their economy also on the Soviet model. Inefficient, massive state controlled industry continued to bumble along, hidden in part by the democratic process. The country felt it was a succession of poor politicians rather than the entire economic model that was at fault.

While China recognized the shortcomings of the Soviet system in 1978, India wouldn’t reach that point until 1991 when the country suddenly found itself close to bankruptcy. What is little understood when examining the background and development of both nations is that both came from the same Soviet economic and central planning model. China, with just a one party mechanism, recognized its shortcomings earlier than India did. This is the main reason that China has galloped so far ahead over the past fifteen years. It simply had more than a decade’s head start in its development and reform policies.

India’s reforms began in 1991 when the government declared a state of emergency and proceeded to recruit international experts to pull the country out from its economic woes. One of those, Dr. Manmohan Singh, was then a renowned international expert on economics and now is the country’s prime minister. Like China, reform in India began tentatively. The final barrier was removed earlier this year, when for the first time in 20 years, an Indian government was elected that had a de facto majority, the key for pushing through meaningful reform.

To demonstrate exactly what these means, I tried recalling when Beijing’s six lane Capital Airport Highway was built. My colleague and national tax partner for Dezan Shira & Associates, Sabrina Zhang and I came to the conclusion that it was finished about sixteen years ago. The highway had replaced the simple two lane road that was often populated by local horses and carts as well as black limousines and taxis. Looking at New Delhi, their airport highway is now only reaching completion to the same standard. So the difference between China and India can be summed up by saying that one has had reform and development for about fifteen years longer than the other.

However, I disagree with Acharya’s conclusion that India is destined to always be lagging behind. He wrote: “Many believe that on current trends India will achieve China’s present economic conclusion in about 15 years. Perhaps. But it is not unreasonable to expect that the Chinese economy will have also expanded threefold.” I don’t buy this pessimism or defeatist view.

The two countries are radically different, but to get to Acharya’s position means China must maintain its growth rates from a far higher current platform than India. It’s easier to demonstrate GDP growth from a lower base than from a high one, and this is where India’s GDP figures, I predict from next year, will start to outstrip China’s.

China is also aging, while India remains a young country, and these simple, yet significant demographics will weigh in India’s favor. As does the infrastructure matter that once a city like Shanghai has a maglev train, it’s developed. Mumbai, its comparable twin, is far from that. What is happening between China and India has indeed been caused by events in the past. Yet simple economic indicators going back do not tell the full picture. The full picture has to include the opportunity, and for now, the opportunity the Indian people have to develop their country, and what that means for investors, is as great as it was for China back in 1978. I took advantage of that by setting up my business in China in 1992. I can spot exactly the same opportunity today in India, which is why my firm is there.

In fifteen years time, I do not expect India to have achieved what China has. But neither did anyone expect China to turn out how it has. Acharya’s article, while looking to the past for definition, forgets one essential ingredient: opportunity. And for now, the scales of opportunity measures weigh heavier for investors in India than they do for China.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and publisher of 2point6billion. He spent 21 years in China and now lives in Mumbai.

This entry was posted in Culture & History, Foreign Trade, Politics. Bookmark the permalink.

3 Responses to India’s Opportunities Lie Behind China’s Shadow

  1. Aditya Singh says:

    I believe it was P.V. Narasimha Rao’s government that recruited Manmohan Singh to initiate the reforms in 1991 and not Sonia Gandhi. Sonia Gandhi was not involved in politics at that stage.

  2. The_Observer says:

    The following is a link for an analysis by Wipro’s Joint Chief
    Executive Girish Paranjpe on how India needs to take advantage of China’s competitive economic environment:

  3. Chris Devonshire-Ellis says:

    Hi Aditya; You’re absolutely right about the government of P.V Narasimha Rao recruiting Dr. Singh, however I believe Sonia Gandhi had a lot of personal clout behind the scenes to help pull it off. A technique she has deployed many times, especially in keeping subsequent coalition governments held together. Whoever was ultimately responsible though we can be thankful for their foresight.

    Observer – thanks for the link and additional info, appreciated.

    – Chris

Comments are closed.

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