India and China are similar in many ways. They are the world’s two most populous countries, are both emerging markets, and were the two largest economies in the world for hundreds of years up until the late 1800s.
But as far as recent economic development goes, the two nations are a world apart.
China’s economy has bolted forward since the country’s reform policies in the 1980s and 1990s. The privatization of businesses created immense amounts of wealth during this period, all while foreign investors rushed to take advantage of the imminent rise of China.
Meanwhile, during the same time period, India suffered because of rampant corruption, endless bureaucracy, inept politicians, lack of a clear legal structure, and many challenges for both local and foreign businesses.
China’s Economic Slowdown
China’s GDP growth in 2014 was 7.5% – the slowest pace in 24 years, which represents a new trend of slower growth that has worried investors and businesses.
Even Beijing has shown public concern, which is notable for a government that is usually secretive about such things. Chinese Premier Li Keqiang told China’s first parliamentary meeting of 2015 that the growth target for 2015 will be 7%, while stressing some of the country’s structural issues.
“Deep-seated problems in the country’s economic development are becoming more obvious. The difficulties we are facing this year could be bigger than last year. The new year is a crucial year for deepening all-round reforms,” he said.
One of the most important problems is corruption. Senior officials in Beijing have vowed to tackle corruption and some of the largest companies in China, such as Sinopec, have been publicly called out and told to clean up their act.
Premier Li in particular has shown that the fight against corruption is one of his main focuses, saying that China will show “zero-tolerance” for corrupt executives and officials regardless of “how senior his position is”. It is estimated that corruption costs the Chinese economy over US$100 billion per year.
In addition, rising wages are causing weak export growth, fixed-asset investment is near a 13-year low, concerns about a property bubble are worrying economists, low oil prices and demand are causing deflationary pressure, and lending data from banks remain poor – just to name a few more issues.
The 21st Century: The Indian Century?
Thankfully, the India’s economy is picking up steam and may be able to help drive global growth well into the future. The World Bank forecasts that India’s GDP growth rate will surpass China’s by 2017, reaching 7% compared to a prediction of 6.9% in China.
It won’t stop there. Projections by Cebr Global’s World Economic League Table (WELT) say that India will become the third largest economy in the world by 2030. Some experts even claim that India will become the world’s largest in the longer-term, as China faces a demographic shift.
Investors have just recently begun to have a more positive outlook towards the Indian economy. Prime Minister Narendra Modi was elected in 2014 and initiated measures aimed at increasing competitiveness, improving infrastructure and government services, and making life easier for businesses.
Arguably, reforms such as these will make all the difference. While China has supported entrepreneurship, mandatory education, and international investment for several decades, India has consistently lagged behind.
High-tax rates, bureaucracy, and lack of government support for SMEs (Small and Medium Enterprises) has stifled wealth creation in India. At the same time, public schooling is notoriously poor and education is not mandatory. This has led to an uneducated workforce and a literacy rate of only 74%.
In short, leadership that is determined to spearhead some much needed policies is what China had in the late 80s and early 90s, but is something India has only had since last year. Now that India has a seemingly committed government, the future looks bright for the world’s largest democracy.
India vs. China: Which is Better to Invest In?
While China may be facing a “slowdown”, the country was still was among the best performing in the world last year and its long term prospects remain very attractive.
From 1979 until 2010, the average GDP growth rate in China was 9.9%. While no one should expect numbers in the upper single digits and lower double digits anymore, most nations would give almost anything for even 6%-7% growth.
Likewise, India is an attractive destination for companies and investors for reasons that have already been explained.
It’s hard to determine whether Indian stocks or their Chinese counterparts will perform better over the short, medium, or long-term. We recommend that investors have sufficient exposure to both countries within an already diversified portfolio.