International | Sep 04 2006
By Chris Shaw
It isn’t new, the story being the potential for India to overtake China as an economic force given it represents the world’s second largest population and is enjoying consistently strong economic growth.
But what is new is what the nation is doing to justify the story, in terms of the developments and changes being made to deliver on the clearly apparent potential. Credit Suisse recently interviewed former main advisor to the Prime Minister and now deputy chairman of the planning commission of the government of Bihar, Nand Kishore Singh, for his insights into the changes being undertaken.
Singh acknowledges there are a number of obstacles in the way, but suggests the Indian approach is the right one as the Indian policy makers are focusing on the country’s most glaring needs. These include a continuation of the policies that are generating forecast economic growth of 8.5% on average between now and 2012 and are targeting further fiscal consolidation, a lowering of inflation and a decrease in the revenue deficit, which currently stands at 4-5%.
Singh also agreeds more needs to be done to restructure the composition of India’s GDP, as currently 24% of the increase comes from agriculture, 50% from services and 25% from manufacturing. This compares to China where about 40% is from manufacturing, a target level Singh suggests should be aimed at. He also sees upside from agriculture, as currently this sector is only growing at 1.5-2% annually, but could in his view achieve annual growth of 4-5%.
It is the comparison with China that allows Singh to make a point of interest, in that India has a significant demographic advantage over its Asian rival. The two countries have similar sized populations, but the one-child policy in China is resulting in an ageing population, whereas India is enjoying the benefits of large numbers of young people.
He notes this demographic advantage is a significant one as a young population should help increase savings, investment and consumption, which should support sustainable growth.
In China’s favour though is a significant infrastructure advantage, but a renewed focus by the Indian government leads Singh to suggest this gap is closing. He notes this is seeing significant sectoral improvements, with the telecommunications sector the first to benefit. This has allowed both costs for domestic users to come down, which is positive for business, and for the nation to offer its services in the global outsourcing market, which creates both profits and higher investment.
Singh suggests transport will be the next sector where improvements become very apparent, likely to be over the next two years. Energy is another key area as the government moves to deregulate the generation, transmission and distribution systems, which is allowing for significant improvements in the supply side as well as creating additional corporate earnings.
He takes the view that as this infrastructure gap between China and India closes the current gap between the levels of foreign investment in the two countries will also close, which would be the final reform India needs to fully establish its position in a global sense.
For investors looking to take advantage of India’s outlook, Singh suggests the energy sector looks particularly attractive currently, while the mining and coal industries and the pharmaceutical sector also provide opportunities.
