Why India Is Not A Meaningful Alternative To Investing In China

| About: India Fund (IFN)

The BRIC nations (Brazil, Russia, India, and China) are thought by some investors and funds to have emerging economies that are rapidly moving towards a general prosperity comparable to that of Europe and North America. They see the BRICs as great sources of products to import and sell in the West and/or great investment opportunities to participate in their rapid growth. As a result, investors are attempting to participate in the BRICs growth by buying shares in their publically traded companies or investing in "emerging nations" funds, setting up factories in the BRIC countries, or sourcing products and services from them.

In a December 27 Seeking Alpha article I analyzed investing and doing business in China and with Chinese companies. My conclusions are summarized in its title, Why Investments In China Will Eventually Be Worthless.

But what about India?

It too has relatively cheap labor and a huge population. And I know from personal experience that the people of India are hard working and intelligent. Moreover, educated Indians tend to be English-speaking and India is different from China in that it is, at least nominally, a free and democratic country governed by the rule of law. And unlike China it has a regularly scheduled revolution, popularly known as an election, which gives its people a non-violent way to throw out the existing government officials and their policies and replace them with a new ones. If history is any guide, India's ability to change governments without violence, upheaval, and property seizures means that its investments and product sources are relatively safe compared to those of China.

A few years ago India and China were neck and neck in terms of per capita production. Now, if one believes the numbers, it appears that China has pulled ahead.

How can that be?

Much of the growth numbers that "prove" China is a better place to invest than India occur because China's bureaucrats have responded to USSR-style five year plans that have higher targets than India's USSR-style five year plans. So to keep their jobs and promotion prospects Chinese bureaucrats have to consistently report achieving the higher numbers to show that they are meeting their quotas. In contrast, the Indian five year plans have had lower targets so India's bureaucrats have been able to meet their obligations by reporting lower numbers.

But faked numbers aside, casual empiricism suggests China's economy has actually moved ahead as a result of China's authoritarian policies favoring exports. India's economy, in contrast, appears to have been stagnating for years except in a few unregulated areas such as call centers. And since India's economy is generally stagnant, China will continue to move ahead of India - until its coming revolution; then, as explained in the December article, China's shares, bonds, exports, and property values will significantly collapse.

But is investing and sourcing in India a good move just because people speak English, labor is less expensive, and its economy is less likely to blow up and collapse than China's?

The answer is no - because India's basic economic problem is much the same as China's: massive corruption and, effectively, a total lack of the rule of law as it relates to economic matters. But there is a basic difference - in China there are no regulations and laws such that business can quickly move ahead whereas in India businesses, other than a handful of new ones such as call centers which the government has not gotten around to regulating, are strangled by excessive regulations that require such large amounts of time and so many bribes that often the inital approvals have long expired by the time the last approvals are received - making it necessary to start all over again.

Similarly, whereas access to courts in China to decide commercial disputes does not exist, the delays in resolving commercial disputes in Indian courts are such that they might as well not exist - decisions are often handed down long after the plaintiffs, defendants, witnesses, and initial judges have all died of old age.

But if the above is true, how is it that the Indian economy is growing?

The basic answer is that the Indian economy is not growing and the average Indian is not better off than he was years ago. In other words, the growth numbers the Indian government reports are as fraudulent and corrupt as most of its officials. Outside a few minor sectors with relatively few employees, such as call centers, production has barely kept up with the increase in population, if it has kept up at all.

There is a better measure of India's growth than the claims of its bureaucrats - the production of electricity. In the real world you cannot produce more per capita without using more electricity. And India's power output appears to have been stifled by the same bureaucrats, regulations, and corruption that stifles everything else.

Bottom line: India is neither a reliable source of products to import nor an economy in which to invest to participate in rapid growth. That's why India's very best and very brightest people emigrate to the United States, and why the United States is where the best Indian-related investments can be found.

Note: The author was one of the very first Americans in China after the cultural revolution (they thought he was from another country called Alaska), spent a term years ago as a visiting Fullbright distinquished senior professor of economics at a major Indian University while on sabbatical from Claremont, and researched and co-authored (with Sarjit Singh) a book and articles on Taxation and Indian Economic Development. He recently revisited India to check out the great economic advances India has been claiming. The company of which he founded and is CEO has offices and employees in India, Bangladesh, and the Phillipines with whom he is in daily communication. He is presently engaged in funding start-up companies in Bangladesh and the Phillipines. He has no plans for India.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.