GARY SHILLING: Here's Why India Is A Better Bet Than China

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Photo: Gareth Copley/Getty Images

Of the world’s big emerging markets, China is widely seen as the most significant and reliable engine for growth, even despite its recent slowdown.Meanwhile, India has been a disappointment with its infrastructure problems and notoriously slow bureaucracy.

But legendary economist Gary Shilling tells us not to write India off just yet.

In the latest edition of his must-read newsletter Insights, Shilling makes a brilliant bullish case for India.

“In the long run, India has many advantages for economic development, especially compared to China, thanks in part to the systems and traditions left over from British colonial rule,” wrote Shilling.

Of course, he warns that India faces many setbacks on this path and needs to implement reforms, improve education and infrastructure, speed up urbanization.

But India has the foundation in place to eclipse China.

India has no limits on population growth

As of 2011, India had a population of 1.24 billion, compared with 1.34 billion in China. And with China's one-child policy, India's population is set to overtake China's.

Moreover, the age distribution in both countries is very different. The dependency ratio i.e. the ratio of children and seniors to the working-age population is expected to continue to fall in India and rise in China. Of course this would only translate into more productivity if the population got education, job training, and job opportunities.

Source: A Gary Shilling's Insight

India's demographic mix will continue to be much more favourable than China's

India has historically had more free market orientation than China

In the years following independence, Indian politics were dominated by the Congress party which tried to emulate the Soviet Union, nationalizing many industries in the 50s and causing foreign investment to decline. But starting 1991, the country shifted towards liberalization and capitalism.

'Nevertheless, India has historically had a much more free market orientation than some other large developing countries, notably Russia and China.' State controlled companies account for 14 per cent of GDP in India, compared with 50 per cent in China.

'India also has a number of large and sophisticated companies such as the Tata complex that can compete globally. In contrast, China is burdened with government-controlled banks and other hugely-inefficient state-owned enterprises that still produce 50% of GDP and employ a quarter of the workforce.'

Source: A Gary Shilling's Insight

India's currency market is more open than China's

China is expected to make the yuan fully convertible by 2015, but Gary Shilling points out that it is still tightly controlled, and while it is allowed to appreciate when the market is good it s held stable when it isn't.

Despite its weakness, the Indian rupee has been 'relatively free of government interventions'. The recent central bank intervention has 'fallen within the Reserve Bank of India's stated policy of intervening only to address severe market dislocations and foreign exchange liquidity shortages'. Policymakers have also liberalized capital flows and allowed foreigners to invest in equities.

Source: A Gary Shilling's Insight

And its central bank is independent of government influence

India's central bank is relatively independent of the government while in China we recently saw governor Zhou Xiaochuan get muscled off the Communist Party's central committee. 'Politicians, not central bankers, call the shots in China.'

In China, 'interest rates are kept artificially low (Chart 15) to provide cheap loans to inefficient state-owned enterprises that account for half of GDP and employ a quarter of the workforce. Consequently, Chinese monetary policy is run mainly by reserve requirements, a crude tool long ago shelved by the Fed and other major central banks since it amounts to credit allocation.'

Source: A Gary Shilling's Insight

In India, consumer spending already accounts for 58.0 per cent of GDP

Whereas in China consumer spending accounts for just 37.7 per cent of GDP

India's exports are less volatile because they consist largely of services, whereas China's exports are more exposed to manufactured goods which are cyclical

India has a high savings rate, but it hasn't slowed domestic consumption

China has a similar savings rate, but consumers are less willing to spend because of limited social safety nets

India has the English language, free press, and legal system inherited from the UK

  • 'The British gave India the English language very useful in today's English-dominated world and a hugely unifying force in a country with hundreds of languages and dialects.'
  • 'India also inherited her legal system from the U.K., very different than the Communist party-dominated courts in China, complete with show trials and forgone convictions.'

Source: A Gary Shilling's Insight

Now check out some strange things that only happen in India...

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