I have three simple questions for you this morning:
Question #1. What’s the most populous country in the world?
Answer: China, of course. Current estimate: 1 billion, 400 million, 666 thousand. That’s more than quadruple the entire population of the United States.
Question #2. What’s the largest economy of the world?
Answer: In absolute terms, the United States.
But if you adjust for the purchasing power of each currency, again, it’s China!
China’s GDP last year — calculated on a purchasing power parity basis (PPP) — was the equivalent of $17.6 trillion, eclipsing the U.S. by about $200 billion. (That’s according to both the International Monetary Fund (IMF) and the CIA World Factbook).
Question #3. In the not-too-distant future, which country is likely to replace China on both counts — largest population and largest economy?
What does this mean?
For me, it means I cannot continue to bypass India in my travels … I cannot continue to mostly ignore it in my writings … and, sooner or later, I must make a place for it in my investment portfolio.
Likewise, for you, it means it’s time to stand up, pay attention, and find out more — even if you feel it’s too soon to commit any real money.
Yes, I know. India conjures up images that can often cause distress, create anxiety, or both.
I am not denying those issues. Nor do I think hardly anyone — whether stricken with India-phobia or smitten with India-philia — would deny it either.
Rather, what I think you and I need to realize is that, in effect, there are two Indias today:
- The India we remember from the most dreadful scenes of Gandhi and Slumdog Millionaire: Unfathomable poverty. Unabashedly egregious exploitation of the poor. Plus, at the same time …
- The India that embodies much of the best of the 21st Century: National superhighways. Secure gated communities. Cutting-edge high tech. Countless individuals with an unimpeachable morality and ethic to help their fellow man. And a lot of new WEALTH!
Yes, the contrasts are extreme. But what makes that so unusual? Why is India singled out as the only country with such contrasts?
In China, the lifestyle gap — e.g. between 21st-Century urban college grads and their own family members left behind in the 19th-Century countryside — is also shocking. In Brazil, the wealth gap is even larger. Even the United States scores very low on this measure.
Want the facts to prove it? OK. Here you go, based on the most recent World Bank stats for each country …
- In China, the average income of the richest 10% of the population is 37 times larger than the poorest 10%.
- In India, it’s actually less — 33.6 times.
- In Brazil, it’s worse — 52.7 times.
- And even in the United States, it’s worse than either China or India — 41.1 times.
Sure, rich Americans have become a lot richer — mostly as a consequence of 21st Century-style growth in the economy. And yes, that helps explain why U.S. income inequality is so high.
But that’s also true for the emerging markets — a lot of new wealth concentrated among the top 10%, also a side effect of their rapid growth.
Clearly, each culture and economy must be understood in its own context. And more importantly, this whole issue has very little to do with your investment success or failure. I bring it out only to dispel the notion that India is, for some sublime reason, the only country suffering from extremes.
Bottom line: If you can invest comfortably in the highest quality assets in the United States, you should also be able to do so by targeting the highest quality assets in India.
The Next Major Transformation
Look at it this way: 46 years ago, when China was still in the early stages of a major economic transformation, and when foreign investors were first able to buy Mainland China’s blue chip stocks traded in Hong Kong, if you had invested a meager $10,000, you could have at least $2.6 million today.
Within that same time frame, one of China’s most widely held companies, HSBC Holdings stock surged from HK$4.58 per share to HK$78.25 today. And Sun Hung Kai Properties Ltd. has surged from HK$6.23 to HK$129.40, Hutchison Whampoa Ltd. has jumped from HK$4.95 to HK$117.10, and CK Hutchison Holdings Ltd. has exploded from just HK$5.05 per share to HK$171.80 today.
Can you achieve similar results if you invest in the same kind of Chinese companies today? Unlikely.
Yes, there are many promising investment opportunities in China. But the ground floor of China’s megaboom is now far behind us. By contrast, in India, although it’s also too late for the ground floor, you can still get into an early stage of the economic transformation now under way.
Another disclaimer: The transformations of China and India are different in this sense:
- China has transformed itself from (a) a closed, isolated, economy that was thoroughly communist and centrally controlled to (z) a relatively open, globally-connected economy that is, in many respects, no less capitalistic than many Western countries. That’s like accelerating from near 0 to 100 mph in a heartbeat.
- The economic transformation in India is less radical. Prime Minister Narendra Modi is shifting the economy from more to less government interference and control; from less to more entrepreneurial freedom and incentives.
But that’s still a very big deal! And it’s the main reason India’s prospects are so bright right now. The editors at Seeking Alpha, put it this way:
“The reforms put forth by the new Indian government under Prime Minister Modi intend to privatize state assets (especially the financials and power sectors), increase foreign direct investment, reduce the fiscal deficit by cutting subsidies, deregulate the labor market, upgrade infrastructure and reform the tax regime. We believe these improvements should unleash investment, increase efficiency, raise productivity and boost growth.”
The other reasons:
1. Demographics! Like I said at the outset, in the not-too-distant future, India will probably overtake China as the most populous country in the world …
And as you can see from the table, this is not just about total numbers of people. What’s more important is the rapid growth in urban population, where the 21st-Century India is concentrated (although certainly not exclusively so).
By 2020, 35% of the population will be urban areas; and by 2050, a whopping 52%.
2. Economic growth. In two other large emerging markets — especially Brazil and China — growth is slowing, and in Russia, it has even turned negative. Among the majors, that leaves only India picking up steam.
Again, just consider the facts:
- China’s GDP annual growth is slowing from 7.4% last year to an expected 6.8% this year and probably 6.3% in 2016.
- In contrast, India’s is accelerating from 7.2% last year to 7.5% expected for both this year and next.
3. Favorable monetary policy. India is focused on managing inflation, which helps the central bank lower interest rates.
4. Stable and strengthening rupee. This reduces currency risk for U.S. investors, and thereby attract more capital.
5. Government budget. Thanks to the lower price of oil and better fiscal management — like cuts in government subsidies — deficits should shrink.
My recommendation: There’s no rush to buy now. Global markets are correcting and could continue to do so. But I’m putting India squarely on my radar screen, and I think you should do the same.
Good luck and God bless!