The Tiger and the Dragon

The Tiger and the Dragon

Is India on-track to overtake China?

Photo: Jeff Kubina. Source: Animal Photos

China’s growth has slowed. We know this from innumerable reports. The reduction in aggregate demand resulting from China’s economic shift from manufacturing to services is at the heart of the bust in commodity prices. But what about India? They have over a billion people, most of whom are trying to emerge from poverty. And they have a competitive democratic system—rather than a Party-led autocracy—along with a free press. Why can’t they grow as fast or faster than China?

Part of the problem in India is optics. When people see pictures of China they see gleaming skyscrapers in Shanghai, or the political symbols in Beijing. The images of Mumbai aren’t so striking. Also, India’s crude infrastructure doesn’t inspire confidence. No one raves about Delhi’s polished international airport. India has less “curb appeal” for investors.

India and China Economic Growth. Source: Charles Schwab

But a bigger reason in India is something common to many developing nations: the pervasiveness of family control over the major institutions in the country. When institutional accountability is weak, families tend to run things. Different families have ways to reward or punish their members. But a family-run system tends to become deeply corrupt. Crony capitalism diverts money intended for development into family coffers. And there is little incentive to innovate or become more efficient.

As a result, India has a bloated government, primitive infrastructure, and a poor educational system, despite the fact that hundreds of millions of Indians want to escape poverty. There are certainly areas of growth—the states of Bihar and Gujurat come to mind—but the country as a whole never seems to live up to its promise.

It’s not enough to have a large, growing population. A country has to be able to put its people to productive work. India has yet to see significant numbers move from the countryside to the cities. In a corrupt system, farmers are reluctant to leave their land.

Still, the potential for growth is there. In a world of oversupply and falling commodity prices, resource-poor countries like China and India should do better. The true promise of both nations lies in developing their internal markets. After all, both countries are richly gifted with the ultimate natural resource: the human mind.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:22:04+00:00 April 21st, 2016|Global Market Update|0 Comments

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