| As an investment destination, India often suffers in comparison to China, but India's problems come from tackling its most difficult problems first. We now perceive a tipping point where structural impediments have been sufficiently dismantled to permit a new form of economic growth. Many investors ignore the order evolving out of India's apparent chaos, while also failing to accept that China's state-imposed order will one day decompose.
This dynamic means that returns from Indian equities are likely to far surpass Chinese equities over the medium and long term.
Structural mispricing of money is ending in India, but not China India often compares unfavourably to China, but India's problems come fromtackling the most difficult problems first; China has postponed these problems. China is not working to privatise its financial system or create a more porouscapital account. China is not focused on domestic consumption-more representative, less corrupt political system. China's economic foundations are based on government-determinwhereas India has moved materially towards market rates.
The post-mercantilist world will begin in India
India is far advanced on China in developing a private-sector financial system. India is nearer to a market rate for exchange rates and interest rates than China. India is less reliant on exports and can move more easily to a consumption-economy than China can. India's private-sector banking system can more easily provide consumer credit,whereas Chinese credit is still needed to support state businesses, not consumers. If China does not abandon mercantilism, it will depress inflation and help Indiato grow.
India's democracy is starting to look like the USA's circa 1900
Foreign investors regularly fled from the chaotic democracy of the late-19th CenturyUnited States. The order of the British Empire was an investment illusion. When India's democracy works, Indians can be as successful at home as abroad. In 2010 there is a general realisation that mercantilist policies have reached their limit. The West's ability to continually gear up to buy more stuff is clearly much more limited now. In particular, it is difficult to see how very populous countries such as China and India can achieve western living standards by sticking with mercantilist policies.
A key question for investors must be how easy it will be for any individual country to make the transition to the post-mercantilist world. While this report deals with the many differences between China and India, the crucial conclusion is that China still faces many hurdles, whereas India is far ahead.
Whichever emerging market can make this transition would both deliver the returns expected from high GDP growth, while simultaneously breaking the correlation of returns with developed markets. India is the Asian equity market most likely to deliver. While there is much to criticise in Indian bureaucracy, there is also much to praise. In particular, the financial regulators at the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are forwardlooking and are methodically steering the financial system towards something more fitting to the 21 As communications experts vaunt the ability to leapfrog out-of-date technology, so the SEBI and RBI have the ability to leapfrog the intellectual cul de sac
No regulator will ever be perfect and faults will occur, but the relative stability of the Indian financial system during the recent extreme trial is a key indicator that SEBI and the RBI have, at this stage, put firm foundations in place for India's financial superstructure.
While other regulators have much bad to undo and much to relearn, the Indian financial bureaucracy is ahead of the game. As the western world rebuilds or recasts its financial regulation with the usual unforeseen consequences, it will be "steady as she goes" for the Indian financial system.
We are all in bed with the bureaucrats now, so what matters is whether you are investing in a jurisdiction with good or bad bureaucrats. In the new structural normal, a bad bureaucrat can screw up returns on equity with the same unintended precision as bad management.
In this light, India's plodding but improving bureaucracy has much to recommend it over the newly resurgent bureaucracy of the West, desperate to show its power relative to capital and likely to be rolling up its sleeves and getting ready for a brawl.
India's state is on the retreat. The public debt-to-GDP ratio is already falling. While of course much will depend on the pace of economic growth, a structural rise in the tax take is also working in India's favour. By pushing ahead with the direct Tax Code and the GST, India is making structural strides to fix its fiscal problems at a time when other countries' structural fiscal problems are getting worse.
The "new normal" is more government. In India this might not be the case - and anyway, that government is likely to be one of Mr Rumsfeld's 'known knowns' rather than the numerous 'unknown unknowns' inherent in the rising role of government intervention elsewhere in the world. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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