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Roaring Tiger Bleeding Dragon

[tps_title]Indian and Chinese Economy[/tps_title]

The GDP profiles of both nations have been changing. China has been witnessing a declining GDP with 7.5% growth in GDP for FY15 owing to reducing imports and tapering competitive advantage. India is expected to overtake Chinese GDP rate by end of FY2016 and has witnessed an increasing GDP growth rate with 7.3% growth for FY15. However the new GDP numbers hide more than what they reveal. The GDP numbers are based on new methodology which takes into account Gross Value added as preferred metrics instead of Gross Domestic Product. Further sectors such as agriculture, construction, banking (which account for almost 60% of GDP) are still under performing and visible signs of improvement are still distant. Further, the growth in absolute terms in China far outpaces the absolute growth in India given the sheer size of Chinese economy. The 2013 estimates suggest that Indian USD 4.99 trillion economy is dwarfed by USD 13.39 trillion Chinese counterpart. Further investment rate, which indicates investor confidence in economy, has fluctuated between 35 – 44 per cent in China, compared to 20 – 26 per cent in India. This has in turn led China to proscribe its residents to invest overseas since April 15’.

Attracting Investments

The curious question which both economists and Dalal Street have struggled to answer is which nation is going to be tagged as the next investment magnet. While both countries are equipped with challenges and opportunities at plenty, India with its melody of “minimum government, maximum governance” holds an edge over Chinese economy tightly controlled by government, presuming India can rid of political logjams and lassitude.

One of the distinct advantages India is blessed with is the favourable demographics. While China’s one child per family policy has certainly put a brake on its population explosion, it has also led to increase in median age to 37 years compared to 27 years in India. It is expected that India will overtake China in terms of active workforce by 2028, which gives India a workforce equal to current workforce of European Union. A word of caution for India would however be to accelerate the growth engine to ensure enough meaningful employment opportunities for potential workforce.

In order to walk the talk, the rejuvenated Indian Government has taken up series of big bang reforms to bring about structural changes in Indian economy and investment ecosystem. The public sector banking system is being revamped by setting up Bank Board Bureau leading to corporate governance in banking sector. This should help in bringing down NPA levels in the country.

To bring about an infrastructure push, GoI (Government of India) has set up National Investment fund with a $3 billion a year contribution from government. Further in order to enhance Investment sentiment around Indian ecosystem, the government has brought about transparency in auctioning of natural resources such as coal and telecom. The Government is trying to rectify the energy backbone of country by revamping financially distressed discoms and genco through reform linked subsidies and grant.

Such structural changes has brought about an active interest among foreign investors who have started relooking at India with new zeal and interest. Announcement of Sequia Capital to set up VC fund of USD 800 Million dedicated for India Specific investments. The huge Domestic market in India has led VC funds and PE funds such as Blackstone , KKR , TPG capital to knock on Indian doorsteps through India dedicated funds.

One of the major game changes in Indian Economy would be implementation of Goods and service tax which would replace state level taxes and place a single jacket formula with single nationwide goods and service tax. GST implementation, committed to be implemented by April 2016 would help to Increase GDP and growth by almost 1- 1.5% and help in resolving various Indirect Taxation issues

Policy changes such as entry to foreign investor in railways ( India’s largest employer ) , raising FDI in the defence and insurance sector to 49% and de-subsidizing diesel have been welcomed by Investors and economist alike. Campaigns such as Smart Cities , Swatch Bharat and National Skill Development Program have created an ecosystem conducive to private sector investment. Above policies reform have had a desired effect reflective in reduction of inflation 4.87% for April 15’ (from 8.33 percent in May 2014). Also the CAD narrowed to 1.4 percent of GDP at the end of 2014 from 2.6 percent a year earlier.

A key for India to succeed will be its success in the financial services. The Indian Demographics provide a huge internal market for financial products. The Debt market of India at retail is still not fully leveraged and offers huge growth opportunities for foreign investors. Both Housing finance and consumer finance segments have tremendous growth potential with last few years witnessing a 15-18% annual growth in each segments. With success of Govt. Induced Jan Dhan Yojna leading to inclusion of 150 million new accounts in the Indian Banking System, the banking segment is poised for new level of growth with no more leakage in subsidies and end user benefits.

With more than 30 crore Internet users and expected Indian market to bulge to 137 billion USD by 2020, Digital Space has emerged as major key enabler for resurgent Indian economic success. The fast growing e-commerce market has caught the eye of Venture capitalist and Private equity funds. The Valuation of Digital companies such as Flipkart ( USD 16 Billion ) , Snap deal ( USD 5 Billion ) & Paytm ( USD 2 Billion) far exceed some of the globally renowned Indian majors such as Indian Oil ( USD 14 Billion’ ) and Vedanta ( USD 4 Billion ). The success of digitalization space has been one of major growth areas of resurgent Indian economy.

The healthcare Industry in India has been another feature that has put India on radar of global investors. Health Insurance and medical tourism have gained significant role in economic development in recent years. With 11% CAGR, the healthcare segments is expected to reach 100 Billion by 2020.

However not all is over for China in this rat race. It still holds gross competitive advantage over India in major strategic aspects. India is still ranked a low 142 among 189 nations in ease of doing business owing to lack of single window clearance, bureaucracy and rampant corruption. On the other hand China is ranked relatively higher at 90 creating a more attractive environment for entrepreneurs and startups. With similar population size, size of economy outpaces Indian economy by factor of almost 3 and market capitalization by five. This means even a lower growth rate would ensure larger economic gains for similarly sized population which would further fuel the growth.

Yuan Devaluation

Chinese Bank and policy makers have realized that cheap money won’t solve the fundamental issues of China and have started giving leeway to align its monetary policy to rates determined through market forces. With an urgent intent to reignite the growth engine of China, Xi Jingping has started to liberalize Interest rate and Yuan convertibility. This would also give strength to Chinese long demanding inclusion of Yuan into reserve currency and have special drawing rights. Further relinquishment of the global image of yuan being steered by government controls, would certainly lead to more investor confidence after the initial correction phase.

Conclusion

Beijing has realized that it cannot drive economy further without maintaining a balanced economy driven by consumption and service industries. However this transformation may have its own price in terms of slow down of economy, increased unemployment rate, reduction in Forex reserves. However in case China manages to overcome this hurdle and successfully transform itself, the dragon is very much on path to overcome the roaring Indian Tiger.

 

Avanish HIT_9022  About the Author: Avanish is an alumni of IIM Ahmedabad. He holds over eight years of experience in energy sector,  while working with large multinational corporations.

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of The Indian Iris and The Indian Iris does not assume any responsibility or liability for the same.

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