India Vs. China

INTRODUCTION

With a combined population of close to two-and-a-half billion people , China and India- neighbors across the Himalayas- control a significant portion of world demand. Add to this the high GDP growth rates shown by the two economies in the past five years and you get what is now well recognized as the CHINDIA effect. But what if the two countries are pitted against each other rather than in collaboration? Which of these then emerges as a more favorable investment destination and why?

On one hand there is People's Republic of China, a totalitarian state, with Mr Hu Jintao as President and the Communist Party of China (CCP) dominating the government. On the other, there is India, a democracy, historically under the control of Indian National Congress but having a trend of coalition governments in power for some time now.

In terms of the economic situation China contributed 13% of the world GDP in Purchasing Power Parity (PPP) terms in 2004 . In the same year, contribution by India amounted to 6% of the total world GDP. In case of China the focus area has been Industry that increased its share in GDP from 42% in 1990 to 53% in 2003 . In India, a similar role is played by the Service sector that increased its share from 46% of GDP in 1990 to 56% of GDP in 2003. It must be noted, however, that despite service sector being the largest contributor to the GDP, it is agriculture that still employs the largest number of people in India. Thus, though its contribution to GDP is only 22%, agriculture still employs about 58% of the population .

From an investment perspective, the top sources for FDI in China and India are Hong Kong and Mauritius respectively . This aspect is crucial since later it will be shown that China's FDI figures are actually overstated because of what is known as round-tripping of capital through Hong-Kong.

Looking at the various economic data, a priori China does seem to have an advantage over India because of its sheer size and head start in terms of having started the process of reform a decade earlier than India, but from an investment perspective what does that advantage boil down to? Or is it a disadvantage that the entire herd is riding high on the China story so that everyone is competing for the same pie?

THESIS

Since China has a head start in terms of the time at which reforms began, it already has a beeline of investors, each competing against the other and eating into each other's profit. On the other hand, there's India, considered fraught with risk- political, social or cultural- and consequently very low on foreign investment.

But are the risks that high or are they just perceived to be high? What about the rewards? Do they compensate for the risks? Indeed in the rest of the report it will be proved through facts, figures and data that the risk vs. return analysis highly favors investment in India and that despite each country having its own set of advantages and disadvantages, India stands as much as if not more chance than China of becoming a superpower. The only difference is not all have been able to recognize India's claim as yet. And that is the best part of the news for investors for if it was out in the open and everyone recognized that India is going to be the next superpower then the gains would be significantly less, just as in a race, the rewards for betting on a horse, which is reasonably sure to win, are distinctly lower.

The sparks are there for everyone to see, but only the discerning few can observe the pattern to validate the fire within. And it is those discerning few who spot opportunities in challenges that end up with the highest proceeds. Take the case of international private equity firm Warburg Pincus. Despite skepticism from all corners of the market, Warburg had the foresight to spot the opportunity in the emerging telecom market in India. It invested $300 million in Bharati Tele-ventures, which is today India's largest traded mobile telephony company, between 1999 and 2001. At that time, Bharati's market capitalization was a mere $100 million and its subscriber base a measly 0.1 million. The Indian market was not even on the radar of any of Warburg's counterparts, for whom Asian markets meant just Indonesia or Thailand. But Warburg recognized the signs -potential market of 1 billion people, grossly inefficient fixed line telephone companies, need for cheap communication solutions in rural areas where setting up infrastructure for fixed lines was just not viable - and took the chance.

In a span of 5 years, Bharti's market-cap skyrocketed to a whooping $15 billion and its subscriber base swelled to 14 million. When Warburg offloaded a part of its stake in Bharati in 2005, it ended up making a profit of $800m from selling two-thirds of its holdings. At current prices, its residual stake in Bharati is worth $700m, more than twice of what it had originally invested . Clearly, the rewards more than justify Warburg's risk.

But the window of opportunity is closing fast as more and more companies recognize India's inherent strengths and its vantage position in terms of global business environment. In the retail sector, international giants like Wal-Mart, Carrefour and Ikea are already vying for a presence in $330 billion Indian retail market. With consulting firm AT Kearney ranking India as number 1 in 2005 Global Retail Development Index, others are bound to follow. The property market is also doing very well if the upcoming listing of DLF valued at $25-30 billion is anything to go by . Property prices in India have gone up by 30-35 per cent over the past year and by 60-70 per cent over the last two years. January 2005 witnessed the biggest land deal in India with Mukesh Ambani led Reliance Industries buying a Mumbai Metropolitan Region Development Authority (MMRDA) plot earmarked for a convention and exhibition center for an astronomical Rs 1104.1 Crores.

In technology space again, the competition is increasing very fast. While Cisco systems announced investment of over $1billion in India in October 2005, Microsoft Chairman Bill Gates bettered it with plans to invest $1.7 billion to expand operations. Intel, the world's largest chipmaker, also announced similar plans for expansion worth $1 billion over the next five years . It is the same story across sectors. From Toyota, BMW in automobiles to Nokia, Motorola in mobile technology, the entire who's who of the global corporate arena is planning to go big on India.

In the capital markets too, the growth story continues. The Sensex rose by over 250% from 3300 in December 2002 to 11192 at the last close on August 11, 2006 riding