C.J. Lawrence Weekly – Will China’s Pain be India’s Gain?
By many accounts, the pace of growth of the Chinese economy has been slowing over the past two quarters and the Chinese government is considering new sources of stimulus to help the country sustain its 6.5% target rate of GDP growth. The imposition of import tariffs on many Chinese goods destined for the United States has cast doubt on whether that country’s export-led economy can keep pace. Whether the next round of tariffs goes into effect or not, the threat alone has global supply chain managers re-examining their manufacturing and logistics networks and considering alternatives. With a burgeoning middle-class consumer population, it’s likely that China can continue to grow at a good clip fueled by its domestic activity alone. But if trade between the U.S. and China, the world’s #1 and #2 economies, slows, who fills in the gaps? Does China’s pain ultimately become India’s gain?
The IMF expects India to recapture its status as the world’s fastest growing economy in 2018. With a population size that is expected to surpass China’s by 2024, and a potential workforce set to climb from 885 million to 1.08 billion in the next twenty years, India’s economy represents a potential powerful engine of global economic growth. Already intent on becoming a global leader in the digital economy, both private and public Indian enterprises have embarked on aggressive spending programs to build out the country’s 5G data network. With only 34% internet penetration across the country, India is able to leap-frog the development of traditional internet infrastructure and move directly to a mobile computing architecture, expediting e-commerce growth and encouraging the development of the country’s consumer class. The potential size of the Indian market has the world’s largest companies positioning themselves to participate in that growth.
But for India, the path to prosperity has been, and promises to be, bumpy. The banking sector is wrestling with rising rates of loan delinquencies and non-performing assets, the steel and aluminum sectors are negatively impacted by recent U.S. tariff programs, most transportation infrastructure is below developed country standards, headwinds from high oil prices are emerging, and deep government bureaucracies make foreign direct investment and market access difficult. But since 2014, despite some periodic set-backs, the Modi administration has made good progress in its efforts to cut red tape, modernize the Indian economy, and raise living standards for the country’s massive population. Recent reports suggest that trade representatives from India and the U.S. are engaged in negotiations for a comprehensive trade deal between the two countries that could pave the way for closer economic ties. With China-U.S. trade rhetoric at a heightened pitch, the India-U.S. negotiations could be coming at a fortuitous time for both. Should the Modi administration continue its success in pushing reforms, and the U.S. and India strike a comprehensive bi-lateral trade deal, the catalysts could be in place for Indian market outperformance. The MSCI India Index is down 9% year-to-date, which is better than most of its emerging market brethren. For long term investors looking for increased emerging market exposure, India is becoming an increasingly attractive option.