November 1, 2005

Is India Another China—Only Better?

Indian Prime Minister Manmohan Singh must have grinned all the way back to Delhi after his official visit to Washington last summer. The reason? Almost unnoticed by the wider world, he had just won the backing of the United States for India’s deepest ambition: to become an official superpower.

President George Bush’s decision in July to recognize India as a legitimate nuclear-armed global power marked a turning point in world affairs. For more than a decade, companies and politicians have busied themselves with concerns about the threats and the opportunities posed by the emergence of a strong and wealthy China. Almost unnoticed, India was emerging as another Asian superpower. Some analysts feel that, in the long term, India’s industrial potential—as competitor as well as customer—could be even greater than China’s.

“I think India is easily the best growth story in Asia right now,” says Christopher Wood, the managing director at CLSA Asia-Pacific Markets, who runs a pan-Asian investment portfolio for corporate clients. “India has fabulous potential, it has profitable companies, and unlike China it hasn’t over-invested,” he says. He is not alone in thinking that China has gone too far, too fast. For example, in a widely circulated forecast, Goldman Sachs (see chart, below) recently predicted that China’s growth rate will soon fall quite sharply, just as India’s begins to accelerate.


  China GDP %
India GDP %
China GDP Per
Capita % Growth
India GDP Per
Capita % Growth
2000-2005 8.0 5.3 9.2 3.7
2005-2010 7.2 6.1 11.2 7.5
2010-2015 5.9 5.9 9.2 7.4
2015-2020 5.0 5.7 7.8 7.2
2020-2025 4.6 5.7 7.3 7.4
2025-2030 4.1 5.9 6.9 8.2
2030-2035 3.9 6.1 6.5 8.9
2035-2040 3.9 6.0 6.3 8.9
2040-2045 3.5 5.6 5.9 8.3
2045-2050 2.9 5.2 5.4 7.6

In part, that reflects increasing optimism about India’s ability to keep its long-term economic reform program on track. Sandipan Chakraborty, managing director of Tata-Ryerson, a steel-processing joint venture between India’s largest private business and Ryerson Tull Inc. of the United States, says the reform program has stabilized the Indian currency, reduced tariffs and taxation, and opened most sectors to investment—all despite domestic changes of government and regional economic turmoil. “Look, we’ve had more than 15 years of reform and it’s still going great guns,” he says.

But for the last two decades, India has languished in the long shadow cast by China. Expanding at 10% or more a year, drawing in more than $50 billion last year in direct corporate investment according to official figures, consuming energy and chemicals and metals with an appetite that grows daily, China will almost certainly become the world’s biggest economy in the foreseeable future.

Where China has moved fast, India has moved painfully slowly. Twenty years ago, India’s annual per capita GDP was just under $1,000 dollars at purchasing power parity (PPP – the measure that adjusts raw dollar income to its real purchasing power), a little ahead of China. Today, China’s per capita GDP is almost $5,500 at PPP; India’s is only a little more than half that.

So while foreign direct investment, goods and services flow into China, India still struggles to register on the corporate radar. That’s partly because of the differing investment models the two countries have followed. China has built up a huge industrial sector that specializes in mass production of relatively low-value finished goods and components, attracting investments from just about any Western company that wants to cut costs in its basic manufacturing operations. India is different, specializing in smaller but higher value-added operations – software development, IT services and advanced engineering. It is no accident that the DaimlerChysler plant that builds Mercedes automobiles in the Indian state of Maharashtra has the best quality record of any Mercedes plant outside of Germany.

In many ways, China will remain an import/export-driven economy and, where the metals market is concerned, one that will find it difficult to produce high-quality product on its own. The returns will be easily predictable and relatively quick. Doing business in India, on the other hand, will entail a longer-term commitment as well as a slower—but potentially greater—payoff.


India’s advantage is that it has one of the best-educated and most cost-effective workforces of all the emerging economies, especially in engineering. “It’s true, India will soon have a larger population than China, and a younger population too,” says Joseph Massey, professor of international business at the Tuck Business School at Dartmouth University. “But there’s a lot more to it than that. It has the advantage of the English language, and its human capital is enormous—India’s best management and technology schools rival anything in the U.S.”

It also has a long tradition of complex manufacturing—General Motors assembled its first Chevrolet in India in 1928.

Its disadvantage is that India does not impress the visiting corporate decision-maker as the sort of can-do environment that China clearly is. Where Chinese coastal cities have six-lane highways, newly built suspension bridges and efficient public transport systems, India has dusty potholed roads, a collapsing rail system and visible evidence of crushing poverty that appall Westerners.

Take the case of the new airport for Bangalore, India’s fastest-growing city and capital of the state of Karnataka, a popular choice for foreign investors since it gained independence more than half a century ago. Like other southwestern Indian states, Karnataka has a pleasant year-round climate, relatively little crime, a cheap and highly educated English-speaking workforce and a business-friendly government. Bangalore is the center of India’s information technology industry, and a popular base for service outsourcing among Western companies. Indian IT and services giants like Wipro, Infosys and Tata Consultancy Services maintain campuses in Bangalore that would not look out of place in Silicon Valley.

Clearly, Bangalore needs an airport to match. The new airport has been planned since the late 1990s, and was scheduled to be completed in 2004. In reality, it is little more than a series of marks on the ground where a future airport might be built. Like so much else in India, the airport fell victim to politics, which often pit state governments against the central government. Completion is now set for 2008. Bangalore’s ambitious plans for a new road system, including a high-speed elevated toll road to serve the corporate IT campuses and a new subway, all have suffered the same fate.

“There’s no doubt, infrastructure is the key to what happens next in India,” Massey says. “India has a lot of advantages over China, and the returns there could be enormous. But the obstacle is infrastructure–to experience what the infrastructural deficit means all you have to do is fly into China one day and fly into India the next. It’s like going back in time 20 years.”

A recent survey of the Indian industrial economy by the World Bank, “India: Investment Climate & Manufacturing Industry,” gives India scores lower than China and other important competitors like Brazil and Mexico on a wide range of infrastructure measures. India has barely 2,000 miles of expressway, compared to China’s 35,000 miles. Shipments through seaports are subject to extensive delay, so inventory time for industrial inputs is higher than in China.

Communications are expensive. It takes longer to get connected to the fixed line phone network, twice as long to get connected to the national power grid than in China, and companies can expect nearly 17 significant power outages per month (compared with fewer than five in China). The rail transport system is deteriorating, and many companies now refuse to use rail freight not only because it is costly and slow, but also on grounds of safety. The amount of commercial freight carried by rail has halved in the last 20 years, largely moving to road.

India needs to move from today’s piecemeal investment in power generation and telecommunications to large scale renewal of its roads, rail and port facilities – the kind of investments that will create huge demand for steel and specialty metals. In a recent interview with The McKinsey Quarterly, Prime Minister Manmohan Singh estimated that India needs at least $150 billion of new infrastructure investment in the next eight years.

“In my view that’s a minimum figure,” Massey says. “The only way India is going to get near that figure is by opening these sorts of investment areas up to profit-making systems. That’s hard for India to do, but they have to accept that people need to make money in infrastructure too.”

Chakraborty of Tata-Ryerson agrees that “infrastructure is vital.” But he also believes that building the kind of roads, ports and airports that Prime Minister Singh envisages could severely strain the economy. “India wants to achieve 10% growth,” he says. “But at the current level of infrastructure spending I don’t think they will be able to achieve double-digit growth. Certainly there has to be a question mark over getting to 10% growth or more and still being able to control inflation.”


India’s failings should not obscure its achievements in changing the way its economy functions. India spent the first few decades of its independence trying to limit the influence of foreign capital on its economy, building administrative and regulatory barriers to impede anyone who wanted to invest. India became known, justly, as the most over-regulated economy in the democratic world. Yet since the government of Prime Minister Rajiv Ghandi began the slow and painful process of opening up the economy in the 1980s, much has changed.

At first growth was very volatile, spiking briefly to an annual 8% in the late 1980s before sinking below an annual 4% at the beginning of the 1990s as a financial crisis undermined confidence and investment. The government responded with a deeper reform package that cut trade barriers, and began to sell off state-owned companies. The economy has continued to grow by fits and starts, but the trend is upwards. The World Bank says that India’s total GDP in 2004 was $691 billion, ranking it the 10th largest economy in the world. Growth hit a record annual 8.6% in 2003, falling back to around 7% in 2004. Forecasts for 2005 vary. The Asian Development Bank forecasts only 6.98% growth for the year to March 2006. Indian government sources suggest that growth for the full calendar year will exceed 8%, partly due to lower oil prices earlier in 2005.

As reform took hold, global companies began to take India seriously as a place where they could invest profitably. In 1980, the number of foreign automakers with significant investments in India could be counted on one hand with fingers to spare. Today, Suzuki, Hyundai, Ford, Honda, Fiat, GM, Toyota and Skoda all have large slices of what is the fastest growing passenger car market in the world. Some, like Ford, are beginning to export complete cars in volume from their Indian base. Others, like DaimlerChrysler, source components for global operations from India.

“This is one of the areas where Indian companies already are turning into direct competitors for U.S. companies,” says Abraham Stephanos, head of marketing at Tata-Ryerson. “A lot of Indian components makers are now globally competitive, and they are already exporting to the U.S.”

Does this mean that India will soon be the kind of customer for processed metals and other industrial imports that China already is? Chakraborty of Tata-Ryerson says freight costs always will mean that North American companies will find it hard to compete in India. “That’s why U.S. metals companies should see India primarily as a production base,” Chakraborty says. “Setting up in India gives you an immediate cut in production costs with no cut in quality. Also you get revenue growth. Remember growth here is 7% or over, and margins are better than you would get in the U.S.”

Where China has driven its economic growth by sheer force of political will, opening up trade channels, creating low-tax economic zones, and forcing the state-controlled banking sector to deliver an endless supply of cheap credit to businesses whether they are viable or not, India has waited for the private sector to take its own initiative. Where China has a relatively homogenous society, the largest in the world, India is a patchwork of cultures and languages, a federation of 29 semi-autonomous states that range from the dynamic and wealthy in the southwest to the much poorer provinces of the northeast. For companies that seek predictability, India can seem daunting. But India also has a hidden advantage that is only just beginning to have an impact on economic performance.

The advantage is the relative youth of India’s workforce. China is getting older much faster than India. India’s working age population will continue to grow for the next two decades at least while China’s is now beginning to decline. By 2025, the percentage of the population that is 65 or older will be 21% in China, against 13% in India, says the Asian Development Bank. By 2050, the contrast will be even more stark: more than 40% of the Chinese population will be over 65, compared to 25% of Indians.

And in this global economy, demographics drive growth. During the last century there has been a consistent positive correlation between long-term growth rates and the low dependency ratios associated with relatively youthful populations.

A recent long-term growth forecast from investment banker Goldman Sachs suggests that demographic decline means that China’s growth trend also will soon decline. The bank sees Chinese average growth rates peaking in 2005-2010 and declining thereafter. India, meanwhile, will continue accelerating until 2040. India, the report says, will be growing faster than China from 2020 until well after mid-century.


Almost one-fourth of the 40 richest men in India, according to Forbes, are connected to the metals industry.
Rank Name Company Worth ($Mil) Age City
1 Lakshmi Mittal Mittal Steel 11,200 54 London
3 Mukesh & Anil Ambani Reliance Industries 6,400   Mumbai
4 Kumar Mangalam Birla Hindalco Industries 3,500 37 Mumbai
5 Pallonji Mistry Retired 2,900 75 Mumbai
11 Anil Agarwal Vendata Resources 1,200 51 London/Mumbai
12 Shashi & Ravi Ruia Essar Group 1,100   Mumbai
13 Om Prakash Jindal Jindal Group 1,000   Delhi
28 Baba Kalyani Bharat Forge 500 55 Pune
37 Jaiprakash Gaur Jaypee Group 340 73 Delhi



Private consumption is one of the forces that is already driving India’s economy. For the first time in history, a fiscally conservative society is going out to spend. Recent research published by Deutsche Bank, “India’s Changing Households,” shows that Indian consumers are not quite like consumers in the rest of Asia. Instead of spending on domestic goods and personal care, Indians buy bigger ticket items like vehicles, travel and restaurants. Interest rates are at historic lows (7.5% for a new car), and retail banks are beginning to introduce consumers to credit cards.

“Private consumption is one reason why domestic-oriented stocks have been outperforming
export stocks since 2002,” says Christopher Wood of CLSA. If stock markets are any guide, India has
certainly been sending a signal of coming growth. The broad index of the Mumbai stock exchange has risen more than 50% in the last 12 months. Over the same period, Chinese equities have fallen by 4% in dollar terms since last December.

But private consumption alone cannot raise Indian growth to the government target of a long-term average of above 8%. Achieving that depends on the Indian government’s long-term spending plans. Large-scale investment will only take shape when India starts showing economic life across its geographical area—and that may already be happening.

In recent years, foreign direct investment (FDI) has been concentrated in six of India’s 29 states and “union territories.” The World Bank’s recent Investment Climate Report shows that more than 80% of foreign direct investment in 2000-2003 went to Delhi, Maharashtra, Karnataka, Tamil Nadu, Chandigarh, Gujarat and Andhra Pradesh. But the pattern is changing. World Bank figures show that the share gained by the high-FDI states has been falling, and companies say they are increasingly willing to invest in states that previously have been off limits. In the last five years, Philips, Siemens, Computer Associates, Matsushita and LG Electronics invested in West Bengal. That reflects a new business orientation in states that previously were a byword for obstructionism and labor strife. It also reflects the emergence of a consuming middle class across India. “The Whitebook of 2004,” BusinessWorld’s marketing bible, reports that there were 30 million middle class and wealthy households in India in 1994-95. By 2005-2006, that will have increased to 81 million households.


India’s potential has long been considered lower than in comparable emerging economies because of its history of economic isolationism, and because of the experiences of foreign investors. Now though, there is a feeling among companies that reform has begun to bite, and that today’s high growth rate can be sustained.“A lot of what happens next depends on the willingness of India to accept and go on accepting foreign direct investment,” Massey says.“In the past there has been a xenophobic attitude to foreign investment, with lots of arbitrary controls and barriers. Now I think that has turned around.” Many industrialists agree. “I have 35 years’ experience of manufacturing in India,” says Kuldip Khushoo, head of operations at Honeywell Automation India. “And in the last 15 years what has happened is that there has been a terrific sea change here, a real opening up of the economy.”


India has a reputation as a difficult place to do business. Bureaucracy is legendary; decision making can be slow. But business people say that the environment is changing, and there are also advantages in the Indian way of doing things.

As with all emerging economies, India has two centers of decision making—the government and private business partners—that any foreign company has to address. The Indian government has removed many barriers to inward investment in the last 10 years, but companies wanting to build operations in India still face a host of government-set limits and controls.

Investments of 100% now are permitted in a wide range of businesses from advertising to pharmaceuticals. Most importantly for the metals industry, mining and processing of all minerals other than some gemstones is fully deregulated. But other sectors, such as media and banking, are subject to investment caps, and a few sectors such as retail trade remain effectively closed to foreign participation.

These sector-specific limits on foreign participation have an indirect effect on other industries. For example, restrictions on financial services mean that heavy industries like metals may find it hard to get cost-effective insurance in India.

Companies say that while government administration can be slow, it is also reliable. “Sure, there is corruption and there is bureaucracy,” says Sandipan Chakraborty of Tata-Ryerson. “But the most important thing is that corruption is diminishing, and that Indian bureaucracy is getting a lot more efficient.”

Investors have much more pressing complaints about India’s tax system and its intrusive labor regulations. Although there have been recent attempts to unify indirect taxes, there remain numerous state-by-state border taxes and administrative procedures that make effective distribution a near-impossibility.

“Any new business coming into India has to understand local politics,” Chakraborty says. “In particular, you need to understand that each state has its own taxes and its own border duties. This is one reason why joint ventures are so useful for new entrants.”

Labor regulation is still suffocatingly tight in India. Under the Industrial Disputes Act, businesses with more than 100 workers have to secure the permission of state governments to close businesses or lay off workers, and other legislation makes it difficult to redeploy workers. On this key measure of hiring and firing, the World Bank reports that among global companies operating in emerging economies, only Mexico is considered as restrictive as India.

Indian companies do not always find these regulations quite as frustrating as do foreign investors. After decades of artificial controls, many Indian companies are still unused to fiercely competitive markets.

But there is a new breed of Indian company that is very globally aware. After all, the world’s biggest steel company, Mittal, has its roots if not its operations in India.

Joseph Massey of the Tuck Business School at Dartmouth University believes that the gradual internationalization of India’s companies and economy has already reached a turning point. “India is on a course that is going to be difficult to reverse now,” he argues. “It’s partly because of India’s sense of competition with China. They’ve seen that China has grown because China opened up to foreign investment. Now India wants to do the same.”