Indian takeaways

Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.

Indian takeaways

India, to an extent, has been in the shadows of the China growth story. The country has yet to reach the same social and economic development that China has today but behind the scenes some remarkable changes are taking place. In our note we look at how far India is from bridging the gap between its development and that of China’s.

According to the International Monetary Fund (IMF), in terms of size, India is set to become the world’s fifth largest economy in 2018, overtaking the UK. To get to this point the economy’s growth rate has been very strong compared with the group of 20 nations (G20). This also holds true when we examine growth rates for India versus the UK and the US. However, in the below chart India’s growth rate, when shown against China’s rate of expansion, has lagged. It overtook China in the growth stakes in 2016 when China had a growth scare, but failed to gain momentum. Today, according to the dotted line forecasts, India is poised to yet again overtake China in a competitive race to grow wealth and prosperity for their people.

One reason why India has lagged China is that the Chinese economy has achieved an impressive economic transformation that many people thought would be impossible. The Chinese economy has delivered double digit economic growth for long periods, however, their ability to sustain such a level becomes ever more challenging as the counry evolves into a developed economy.

On current trends China is heading towards a growth rate of around 6.5%, according to official targets, whereas India’s economic growth appears set to move upwards towards an 8% growth rate, and perhaps higher.

Real GDP (Year on Year) Growth rate

Source: Bloomberg 2018 – (Real GDP is a measure of growth taking account of inflation)

One potential source of impetus is India’s gigantic population, 1.2 billion and poised to become a country with one of the highest proportion of young people. By 2020, 65% of the total population will be less than 35 years old. This presents a unique challenge and a tremendous opportunity. India will need to create at least 15 million jobs per year to keep up with demographic trends. To put this into context, the US economy added 2 million jobs last year in one of the strongest years for the labour market since the turn of the decade.

One effective way of gauging the state of development of an economy is to examine per capita GDP. This percentage measure expresses the total output of the economy spread over the entire population. Calculated in this way it is possible to compare one country’s productive wealth with another.

In the chart below, we show per capita GDP generated by rich economies like the US and the UK and compare them to those of China and India. This reveals that China is catching up, but India still lags behind; hinting at the scale of the task and the size of the opportunity. In reality, both economies have a lot of catching up to do to generate wealth on the scale seen in our country.

Per Capita GDP ($US)

Source: Bloomberg 2018

Besides creating more jobs, improving infrastructure and leveraging the use of technology, some of the toughest problems lie in establishing sufficient healthcare and education structures to cope with increasing demand. Therefore, to realise the opportunity, India needs to develop its infrastructure and drive technology to improve productivity.

It is thought likely that India will turn to developed economies and to countries such as China for guidance. This will require foreign businesses to deploy their capital, infrastructure and investment expertise. Inward Foreign Direct Investment (FDI) to India has been flat over recent years, failing to attract the attention of foreign investors. With competition for global capital fierce, India has lost out and part of the reason is that China has been favoured by global investors. The below chart highlights FDI coming into India compared to China, UK and the US (the same countries used above).

Inward Foreign Direct Investment (US$, millions)

Source: OECD, 2018

The road ahead for India will not be smooth. To enjoy success the country needs to experience careful management of the economy. International investors need to be kept informed and remain onside with necessary economic reforms. Missteps such as poor communication of intentions by governments can upset investors. For example, the government withdrew two large denomination bank notes making them worthless overnight (a process known as demonetisation). The government also implemented a Goods and Services Tax (GST) this year. This was meant to simplify a complex set of taxes but caused discontent as it seemed to favour the extremely wealthy over the growing middle classes and poor.

In conclusion, whilst the gap between India and China remains wide, India is on the up. The country offers a profitable and diverse corporate universe with a compelling market structure. The diversity of publicly-listed companies that offer access to the rise of the consumer in India is beginning to be appreciated by a growing band of global investors. India does not have the same state-owned enterprises (SOE’s) that have helped power China’s success but with a growing band of entrepreneur inspired businesses this may turn out to be a blessing. India could represent a tasty meal for future investors to enjoy.

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.

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