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*Originally posted by Abdali: *
Please don't insult India by comparing with China. India is a super economy and a super power. It falls under different category.
Now, can someone provide export figures for China+Hong Kong for 2003.
And I will post some pictures of chinese cities, close to 166 that still need lots of improvements to take them out of the biggest slums of the world. Poor chincoms. :)
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Abdali,
You are right ...
Compared to China, India's economic growth rates aren't quite as exciting -- around 8% in gross domestic product (GDP) in the year to March 2004, of which about 1.5% was due to a very favorable monsoon in India's still predominantly agricultural economy. In the year to March 2003, when the monsoon was poor, the economy managed only 5% growth.
Yet, India has one enormous structural advantage: It is coming to capitalism not from a true command economy, but from a Third World state socialism that was undoubtedly very inefficient yet still allowed small business to flourish and personal freedoms to survive. India's moves towards capitalism, therefore, are slower than those in China, because the political system delays and dilutes them. However, they work with the grain of the society that already exists, not against it.
India began to reform its socialist system under the Congress party in 1991, and progress accelerated with the arrival of Prime Minister Atal Bihari Vajpayee in 1998. The country's very complicated system of national elections (it's the world's largest democracy by a considerable margin) swings into action in April and May, and Vajpayee is expected to win a new term of office. Even if he doesn't, the commitment of the previous Congress government to reform is likely to continue in a new Congress-dominated coalition, so momentum towards the free market might well slow but it is unlikely to cease. Rapid progress in reform is not necessary; with the Indian labor cost advantage being so great, and the momentum built up by the economic opening so solid, it would require a massive effort of misgovernment to halt progress at this stage.
The important thing is not the pace of Indian economic growth, but the fact that it's now considerably faster than population growth, and likely to stay that way. As each year of 5%-8% economic growth succeeds, more and more Indians are dragged out of subsistence agriculture into the cash economy, and more and more young Indians are able to get an appropriate education. Thus, the investable sector of the Indian economy, in which an internationally competing work force produces internationally competitive goods and services, will grow for many years at a much faster rate than the economy as a whole.
Risks
There are the usual political risks. An India-Pakistan war would clearly hurt, but is perhaps less likely than it seemed a year ago (the two countries are currently playing each other at cricket!). However, one advantage of emerging-markets investing is that it exposes you to a set of risks that is largely different from and uncorrelated to those of investment in the U.S. In that sense, to expose 10% of your portfolio to the possibility of an India-Pakistan war may be a conservative strategy if the other 90% is exposed to the problems of the U.S. budget and trade deficits.
However, one caveat remains: India is one of the most corrupt societies in Asia, and that corruption is not yet showing definitive signs of improvement. It is neither a regional nor an ex-British Empire problem; Malaysia, for example, is only moderately corrupt, and international investors have made good money there for 30 years. In India, the huge "permit raj," erected by the Congress governments of 1947-1991, bred a culture in which the only way to deal with government was to bribe officials. Such a culture is not eradicated in a decade, and it makes India a very difficult place for foreign companies to do business.
The stock market
The Indian stock market has been strong in the last year. The Mumbai Sensex stock index has fluctuated in a range between 3,000 and 6,000 since 1997, peaking at over 6,000 in early 2000 and at the end of 2003. It is currently somewhat below its peak, at around 5,600. At these levels, there is no sign of a Nasdaq-type overvaluation, and there's some possibility that you are still close to the ground floor of a lengthy revaluation of the entire market.
As far as currency is concerned, the Indian rupee is managed against the dollar, and has risen by about 12% against the dollar in the past year. Historically, the rupee has been a weak currency because of India's lack of foreign exchange reserves, but that is not currently a problem. Certainly in the long term, if India's economic growth keeps up, the stock market will enjoy a sustained, long-term price rise accompanied by an increasing inflow of foreign capital. In spite of its size, India is still not well studied by the institutional investor community.