Is India really the laggard behind China?
India is still 10 to 15 years behind China in terms of implementing a market-driven economic policy. Thereform started in the early 1990s in India, whereas it wasthe late 1970s/early 1980s in China. I think the growthcurve in India will track the Chinese curve, but with larger volatilities and swings associated with developing amarket-driven economy. Therefore, comparing these twoeconomies at this point in time is possibly unfair. Changeis happening in India, but its effects will be moreperceptible in the future. In the last 10 years, followingliberalization, the Indian national highway system hasimproved and the government has commissioned severalhighway projects; communications, i.e. mobile phonegrowth, is comparable to China and the increase inconsumption patterns has been real (i.e. sustained growthover the last 10 years), albeit from a low base. Another tangible change is the transition of millions of people fromlower economic strata into the middle class.Rampant urban poverty in India could be explained by theincreasing mobility of people from the rural (poor) areas tothe relatively richer cities – the government’s democraticsystem does not stop this. However, the Indiangovernment is accountable for the lack of infrastructure,lack of cleanliness, and poverty; if it does not address theseissues people will vote the government out in the nextelections. In addition, India is moving away from acentrally managed economy to a more market-driveneconomy, which means the public sector to private sector ratio has experienced a steady decline i.e. the privatesector is growing faster and creating more opportunitiesfor private equity investors. The private sector is becomingincreasingly important in pulling people out of poverty bycreating large scale employment. I would add that thegrowth in India could be more sustainable as thetransparency in media, press, and markets allows thecorrections to happen immediately, rather than beingdelayed to a later date.In terms of returns, the public market in India is moreaccessible to foreign investors and has delivered goodreturns for short term equities investors
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. Anecdotalevidence suggests value has also been created for a lot of real estate funds and hedge funds in India. As far asprivate equity is concerned, the Chinese market is deeper and has delivered better results on average to-date
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. The‘type’ of risk associated with each of the economies isdifferent and the comparison of just returns may not befair. To quote economist Ajay Shah: “Economicdevelopment is a marathon, one should not sprint it. Indiahas poor governance, but its people have a voice andfreedom. India does not need a government to drive itsgrowth, but it needs its people to have aspirations andvision.” Even though China seems to be ahead in terms of private equity returns at the moment, India has thecapacity to catch up with China in the future.
China
Those studying the region of China need to be mindfulthat its major cities, such as Beijing (the capital), Shenzhen(a second Hong Kong by close geographical association)and maybe Shanghai (the China tourist city by anydefinition), are hardly representative of the enormity andcomplexity of China which has 31 provinces, 280prefecture level cities and more than 2000 county levelcities.Beijing, Shanghai and Shenzhen and a few other cities arewhat I would term “show flat” models: you visit them,observe what they would like you to see and bring thearchitect’s impression back to your fellow countrymen. Thelocal dynamism, undercurrents and what lies beneath thecracks in the rest of China is hardly visible to the nakedeye unless you live and travel intensively in the country for a few years. Much of its growth is driven by local initiativesand developments rather than efforts by the centralgovernment alone in Beijing. Chinese reforms haveempowered local governments with unprecedentedeconomic authority and the effectiveness of Beijing’spolicies has been reduced by the perhaps morefragmented, fickle and self-serving nature of local officials.The recent crack down on property speculation is a goodexample where Beijing has found it difficult to get itsdeflationary policy implemented across China as onlysome cities e.g. Chong Qing complied with the policychanges but some of the other cities came up with
June 2011
1Foreign institutional investors (FIIs) have been a driver of inflows into Indian public markets. According to the Securities and Exchange Board of India(SEBI) April bulletin, net purchases for 2009-2010 were Rs 1,42,658 crore (US$ 30,252 million) and 2010-2011 Rs 1,46, 438 crore (US$ 32, 226million) – a record. From its lowest point in March 2009 (8,000 points) the Sensex rose 60% to 20,000 points in October 2010 according to theBombay Stock Exchange2 The AVCJ database shows that trade sales in China in 2010 almost doubled that of India (by value); exits via IPOs for Chinese private equity firmsmore than tripled that of India (by value) and China now accounts for nearly 50% of Asia’s private equity fundraising capital
Two investment analysts at SVG Advisers Limited debate thevirtues of India and China
India
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