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Wednesday, October 15, 2003

China Envy at Fever Pitch?

Some plusses and some minuses in this article by William Pessek in Bloomberg. India never was a 'basket case' for anyone with eyes. India's 'moment of opportunity' is not just a moment either. But at the same time we may not be all the way in yet. Growth in the IT sector is spectacular, but India is enorous and poor. 700 million people live in the villages of rural India, and, although the birthrate is coming down fast, population momentum means that the numbers will keep going up for some time to come. How to cushion this rise, this is India's big problem, and it seems to be all to do with the balance between the rural and the urban. And remember, even if GDP is rising fast, it could be some time yet before per capita incomes really start to rise. ( Thanks to Rueben at the zoo station for the link).

China-envy is reaching a fever pitch as nations struggle to compete with the world's most dynamic economy. The China-all-the-time mindset is making it difficult forothers in Asia to get attention. Nowhere is that truer than India. Even though Asia's third biggest economy may grow more than 7 percent this fiscal year, India is struggling to get onto more executives and investors radar screens. Those who ignore India may regret it. "The India story is a good story and it's likely to get even better", says Rajeev Malik, an economist at J.P. Morgan Chase &Co. Granted, India is getting more headlines as stocks rise, bond yields grind lower and the currency, the rupee, appreciates. Its benchmark stock index is up 49 percent this year in U.S. dollar terms, shining a brightening spotlight on one of the world's fastest-growing economies.

Yet many of India's attributes are being taken for granted, especially among corporate executives. Asking about different economies in Asia, you often get similar answers. China's economy? "Oh yes, we're excited about it", investors say. Japan? "Looking better." Thailand and Indonesia? "Sure, we're paying attention." And India?"Hmmm, well we've got big concerns about the place."

China bulls aren't necessarily wrong. The most populous nation has remarkable potential and its meteoric rise spotlights India's economic backwardness. Twenty years ago, India and China were close competitors, both struggling to pull their mushrooming populations out of poverty. Now India is being left behind. Ignoring India's long-run potential, however, could be one of the biggest mistakes executives and institutional investors make in the next decade. India has myriad problems. Even if the country grows the 7.1 percent groups like the National Council for Applied Economic Research expect, it may not be fast enough to raise 400 million of its 1 billion people out of poverty. New Delhi says it needs 8 percent growth over the next decade to do that. Dodgy infrastructure and notorious bureaucracy continue to steer away the kind of long-term investment China gets loads of.

Yet India is no longer a basket case, and it's likely to be one of the great investment surprise stories of the next decade. There's a reason Boeing Co., Motorola, Australian phone company Telstra Corp. and Accenture Ltd., which manages services and computers for clients including AT&T Corp., have all announced investments in India in the last 12 months. Its appeal lies as much in its pool of software engineers and English-speaking graduates as its billion-person market.

Southeast Asia also is eying India's promise. Last year, India got its first invite to the annual summit of Association of Southeast Asian Nations (ASEAN), yet Prime Minister Atal Bihari Vajpayee played second fiddle to Chinese officials. At last week's summit, Vajpayee was signing trade agreements with ASEAN. Where India has an advantage over China is the nature of its economy. China's is a political one and its success comes from a top-down approach to things. India, for all its problems, is a bottom-up economy in which entrepreneurs are pushing the government to reform and streamline. That tension could give India an edge in the long run. China's boom isn't hollow, per se, but it's heavily dependent on foreign direct investment (FDI); the economy mostly serves the demands and needs of foreign-owned firms in foreign markets. It explains the dearth of internationally known Chinese companies that operate on a global scale and market their products abroad. You would be hard pressed to find a global investor who hasn't heard of Indian software firms like Infosys Technologies Ltd. or Wipro Ltd. Ditto for drugmakers like Ranbaxy Laboratories Ltd. and Dr. Reddy's Laboratories Ltd. The presence of such names explains why India is attracting increased institutional investment, while China isn't.

The question is how much China's rise shakes India out of complacency and catalyzes officials to modernize the economy. Privatization Minister Arun Shourie, whose progress in selling state assets has impressed many investors, warns that China's economy could surpass India's by six times over the next 15 years if the current pace of reform continues. Shourie argues that India's improving growth environment offers a "moment of opportunity" but "only a moment." It's an important point. New Delhi's bureaucracy gets in the way of that opportunity. Entrenched bureaucrats resist change because of political differences, not sound economics. While that's true anywhere, not every nation is dealing with such crushing poverty. Once India begins attracting more foreign direct investment, its comparative advantages over China "like entrepreneurial and management skills" might be reinforced and boost Indian growth. "Countries in Asia seem to be fighting for a shrinking FDI pool," says Gene Frieda, a strategist at the Royal Bank of Scotland. "That won't last forever, though." One sign of hope is the rupee's rise. It indicates a sense of economic maturity and confidence. It's attracting capital into Indian markets, boosting stocks, reducing interest rates and allowing the central bank to keep borrowing costs low. It also is prompting the government to step up plans to repay more high-cost overseas debt before it matures. China is going places, but so is India.
Source: William Pessek Jr, Bllomberg

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