WHY INDIA IS A BETTER BET THAN CHINA (OR BRAZIL OR RUSSIA)? by Gurumurthy Kalyanaram

Comment: This article was written about a year back but the basic facts and inferences remain valid.

India is a better economic bet than China (or Russia or Brazil) if you have a ten or twenty-year horizon. Why?

In addition to the democratization of its polity, and liberalization of its economy (both of which are now legendary), the autonomy and democracy of India’s financial markets, its entrepreneurial spirit, and its educational system are important additional elements that make India so alluring.

This story has not been told, not told at least as vividly.

The norms and regulations of the financial markets, and the enforcement and supervision by Securities Exchange Board of India of these regulations are very credible, if not perfect. And they have made the Indian stock and bond markets transparent and investor-friendly. Rob Gensler, manager of T. Rowe Price Global Stock Fund says, “The quantity and quality of information you get (from Indian companies) is, in many cases, as good or better than what you get from U.S. companies.”

And then listen to Mark Hadley, president of Asian specialist Matthews International Capital Management: “Infosys set the standard for a lot of Indian and Asian companies.”

China’s (and Russia’s) financial markets and corporate governance are primitive. And if you believe Doug North, the 1993 economics nobel laureate, it would take at least 30-40 years for China (or Russia) to develop these institutions.

MIT professor Yasheng Huang tells, “India has done a better job than China” in nurturing entrepreneurship and supporting healthy competition. From India, a group of world-class companies such as Infosys in software, Ranbaxy in pharmaceuticals, Bajaj Auto in automobile components, and Mahindra in car assembly are emerging. And this has not “happened by accident,” per Huang.

Finally, there is the educational system. While there are many flaws to the Indian educational system, there is a fair amount of autonomy and freedom and entrepreneurship in primary, secondary, and higher education. And this has increasingly created a more relevant and market-oriented education (be it teaching of English language or the content of the curriculum.)

Again, per Huang, “India has quietly and persistently improved its educational provisions, especially in rural areas. For sustainable economic development, the quantity and quality of human capital will matter far more than those of physical capital. India seems to have the right policy and if China does not invest in rural education soon, it may lose its true competitive edge over India.”

Finally, political democracy has itself been an excellent prescription for India’s economy. Sure there have been many false starts and erroneous policies but there have been no calamitous decisions. The country has not gone through traumatic experiences of Latin America (where many economies collapsed because they followed market-economy thoughtlessly) or RussiaChina (Mao’s cultural revolution.) (Stalin’s blighted policies) or

In my recent visit to China, Mr. Ji, Chairman of Beijing-Hualin – a billion US dollar company – told me that “there is too little government in India, and that’s good.” Why? “India will never make such huge misjudgments. There will never be a cultural revolution when about 35 million Chinese were killed and the country was set behind by decades.”

India’s political democracy where different constituents make their claims has kept the economic policies moderated.

Look at the recent economic liberalization policies. True, the vigorous liberalization policies initiated by India in 1991 and continued at varying degrees in the last fifteen years have unlocked the growth potential. And that’s wonderful.

But in this enthusiasm for liberalization, India almost forgot the challenge of poverty and its impact on growth and mass prosperity. Over 300 million Indians live in poverty. Per recent World Bank Report, 10% reduction in poverty would boost the growth rate by about 1% and increase the foreign direct investment by about 8%.

So far India to continue its impressive growth, one of the critical components of the strategy has to be poverty reduction programs that add assets to the society.

And this is where the role of Indian communists and socialists is to be commended. Their relentless focus on the poor and disfranchised is very beneficial (though their lack of acceptance of certain economic reforms has also been an impediment.)

The balance that the Indian political and economic policy makers have achieved is now the recommended economic strategy by the recent World Bank Report. And this policy is a direct result of the wonderful pulls and pushes created by the political democracy.

Undoubtedly, India is the best bet of all the emerging markets.