Why India Is Sexier Than China

With President Hu Jintao of China in town and staying less than a mile from my home, and a long-term trip to India for me just five days away, I'm reminded of a question that often surfaces in Foolish stock circles: China or India? Which one will be the greater economic story?

There's no definitive answer for now. And in the end, any answer may prove irrelevant as both will surely be huge parts of the 21st century's economic history. But, for the sake of fun, why not have a go.

If I were forced to choose, my vote would go to India. Here's why.

The difference between the two
Ignoring the fact that I'm half-Indian and am intrinsically biased, much of my faith in India's story is based on what most people find so completely unappealing about the place. Before I get into it, however, let me say that I'm about to generalize pretty broadly, and significant exceptions exist to everything I'm about to say. For the sake of argument, though, stick with me.

China's success since reformation and economic liberalization in the 1980s and 1990s has largely been a story of what the government has done for it. Policy makers in the country have indisputably created a powerful money-making machine, capable of fueling the entire world's thirst for cheap goods. India's situation is very much the opposite.

For decades now, the Indian government has inevitably found a way to hold back or otherwise handicap economic growth. Look no further than the sad state of the country's infrastructure, its immensely convoluted legal systems, and the imposing regulatory hurdles that businesses face just trying to operate there to confirm this point. With all of those obstacles, India is succeeding anyway.

The larger point is that whereas one nation's government has been a key component in its nation's economic success, another's economic success has come largely in spite of its government.

Playing favorites
The Chinese have proven adept at picking favorites in specific industries and allowing them to flourish. China Mobile (NYSE: CHL  ) and PetroChina (NYSE: PTR  ) are perfect examples. They certainly aren't the only players in either industry, but these state-run companies are absolute powerhouses, primarily because they have the unconditional support of their government and the unspoken license to dominate their respective industries.

But this type of careful manipulation comes at a cost -- dynamism within industry can be easily suppressed. Take careful notice that the profits of these two companies together recently surpassed the profits of the nation's top 500 private companies combined.

On the flip side, look at India and its mobile telephone industry to witness the fierce battle being fought at every level for every piece of the capitalism pie. The industry (and others like it) may not be nearly as neat and polished as comparables in China, but it's undoubtedly competitive.

Just recently, a massive, multibillion-dollar scandal has erupted in India embroiling many of the nation's most important mobile telecom players. Corruption is, of course, a wasteful and shameful part of business in India (and to some extent, in China, too), but hey, at least companies are vying for a seat at the table. Unlike one or several state-run favorites that enjoy the fruits of favoritism, the mobile telecom industry in India is dynamic with players like Vodafone (NYSE: VOD  ) , Bharti Airtel, Reliance Communications, Tata Teleservices and many more battling each other -- all probably taking part in these shenanigans individually.

I don't like corruption on any level, but I certainly prefer raw competition to the orchestral manipulation of a hands-on government. In the end, I believe it benefits Indian companies to have to go through that type of process.

Night and day apart
There's something significant to be said for a nation that can manage to eke out year after year of blistering growth in a political and regulatory environment of such questionable efficacy as India's. Imagine what India would be capable of with Chinese-like efficiency in place?

I prefer India to a large extent because the value-bent investor in me sees India as a raw, somewhat mismanaged asset whose inner value is just waiting to be unleashed. When I consider China, with its carefully controlled processes, I see a growth stock that seems to need all the dominos to fall just so in order to continue on its path. In India, the dominos never fall just so (chaos is part of life), and yet the nation is coming along quickly anyhow.

There is an inherent attraction to things that are created organically in life like this. True, there are massive problems in India, which are both open and notorious. But why shouldn't there be? Meanwhile, there is an inherent distrust of the highly manufactured growth that I sense is coming from China. There may be problems, but we'll never know until it's too late because the government controls the flow of information so carefully.

The point is that massive growth in India is an accidental by-product. Growth in China is the product. See the difference?

It's only the beginning …
If the individual consumer in China can force industry to evolve dynamically (without the assistance of the government), little will stop the country from becoming the giant that it is expected to be. After all, China has already done so much to tackle the logistical issues involved in becoming a superpower, whereas India most certainly has not. But, I'm not sure when that day will be.

In the meantime, Indians are quickly learning how to thrive outside of the protective umbrella of governmental favoritism and within the boiling cauldron of fierce competition. I believe the lessons learned during this period will transform India into a dynamic, competitive, and intriguing business destination for centuries to come. But will it be the giant of Asia?

What do you say? Leave your comments below. If you'd like to follow Nick on his India adventure, follow his Twitter feed right here.

Fool Nick Kapur owns none of the stocks mentioned above. You can stay tuned to Nick's adventures throughout India in the coming months absolutely free by clicking right here.

Vodafone Group is a Motley Fool Inside Value pick. China Mobile is a Motley Fool Global Gains recommendation. The Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (35)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 20, 2011, at 12:16 PM, sidhihindi wrote:

    I agree with Nick, India is inspite or rather despite Indian governance that can best be described as extension of colonial british bureaucracy which still has not learn to engage with its citizens.

    The sooner highly civilized character of Indian culture emerge and replace its legacy bureaucracy , the sooner I can see China becoming a democracy,religious heads recognising human rights and corporates creating products healthier to humans and harmonious to nature.

  • Report this Comment On January 20, 2011, at 10:37 PM, FoolishJayhawk wrote:

    Hey Nick -- I think you should visit Gujarat while you're there. The state is firing on all cylinders and from what I hear the government is a little more pro-capitalist than that of many other states.

  • Report this Comment On January 21, 2011, at 10:44 AM, griderX wrote:

    Awesome breakdown of India and China in a nutshell!

  • Report this Comment On January 21, 2011, at 2:41 PM, SussexFIA wrote:

    Why Indian people always want to compare to China?

    They started the same 30 years ago. Now

    India GDP (India average income) = 0.25 * that of China.

    There is nothing to compare.

    If you talk about the stock market, China is way weaker than India, but Buffet principle implies there may be bigger chances for China in the years to come surely.

  • Report this Comment On January 21, 2011, at 4:00 PM, fifty4 wrote:

    good article nick

    i'm interested in your thoughts on this though:

    the idea that "india is competitive but chaotic" and china is "organized but state-planned (not as competitive)" is compelling but it ignores the fact that business culture in the East is very different from the west...

    Not only in China but also in Japan, India, etc, there is a sort of unique culture of shame/disgrace versus honor.

    maybe a bit archaic but i feel like the reason that china's been able to hold so strongly to a one-party system, or huge companies like petroChina continue to grow, is that they don't innovate when faced with competition - they innovate for the honor and pride of their country.

    even though they have jumped on capitalism, culturally they are not as inherently capitalistic. (this will change within a few generations)

    given that india, japan, and china all have – to varying degrees – this sort of culture, china's clean infrastructure and almost corporate way of running their country give them an underestimated lead

  • Report this Comment On January 21, 2011, at 4:49 PM, jgknot wrote:

    for the next 20 yrs, the youth and middle age population growth is gonna help a lot in india's favor.

    if the education system was tuned to more accommodate the breadth of possibilities, the potential is great. and i believe the current young parents and to be parents in their 20-40's will change the way their kids educate.

    we need to fix our river system too, especially with china playing with Brahmaputra in the north and south states having river/water disputes, water scarcity will become a major issue.

    Foolishjayhawk,

    i heard abt gujarat too, bihar is getting better, tn is good too, well everybody is getting better, good for us..

  • Report this Comment On January 22, 2011, at 9:20 AM, JJ0001 wrote:

    I don't want to spoil the fun for you guys, but there are 3 fatal flaws that are common to most Indian claims.

    =========================

    (1) The claim that India "... manage to eke out year after year of blistering growth ..." is simply not true.

    There are 2 ways to measure growth --- In percentage terms or in absolute terms.

    In percentage terms, India ranks 20th in the world (IMF 2009). In absolute terms, India was growing even slower than the US just before the 2008 financial crisis.

    You can't really call that "blistering growth".

    (2) Most Indians speak of India as a success story. But to an outsider, it looks more like a failed state than a success story.

    In every measurable human development index, India lacks far behind most of the world, including many African nations.

    (3) Population growth by itself is NOT an advantage. Africa has a lot of people. It doesn't mean they are doing well, or will do well.

    On the contrary, it can even become a disadvantage if not handled well.

    India's population density (people per square km) is projected to increase from 369 to 476 from 2010 to 2040 (compared to China's 152 by 2040)

    Such population increase is NOT sustainable. Neither for India, nor the world! You will start to see HUGE social problems and chaos in India within the next 10 to 20 years which would cancel out any perceived benefits.

    ========================

    I am sure India can become great. But the current picture doesn't yet look rosy.

  • Report this Comment On January 22, 2011, at 12:55 PM, Beeru10 wrote:

    Nick - I think you are being more optimistic here. The reality is that there is too much corruption in India and the worst thing about it is that there are no way to control it. Even Indian media is in it. In India, bribes are expected and people think that there is nothing wrong with receiving bribes - this mentality alone poses a big problem for the investments in India.

    India may deliver good returns in the next 4 -5 yrs but it is headed for problems. I won't get too excited about how Indian companies are performing now and showing good results year after year and I won't be excited about how fast the country is growing. There is no accountability and eveything can be and is being manupulated and that is the truth. Satyam's collapse and mos recent Relaince (Anil Ambani) fraud are just the tip of the ice berg. Remember, it is easy to get away after comitting any fraud in India.

    Beeru

  • Report this Comment On January 28, 2011, at 1:05 PM, manuagent10 wrote:

    Interesting article. In a fair world I would back India everytime, unfortunately though until the West, especially the US has the balls to make China value it's currency properly, China will eat everyone's lunch.

  • Report this Comment On January 28, 2011, at 2:52 PM, 20thcenturyfox wrote:

    I'm a China scholar and art collector with a natural bias toward China--and I have to agree with Nick too.

    However I appreciate hearing the reasons of someone who knows much more about the Indian economy and business climate than I do!

  • Report this Comment On January 29, 2011, at 3:09 AM, hkc94501 wrote:

    There are a few points not mentioned that would be interesting to know.

    1. Which has the more fair justice system? For businesses this affects the sanctity of contracts and protection of intellectual property.

    2. Which has the more open press? As an investor I want to hear the bad news along with the good.

    and 3. Which has the more reliable financial reports? Are the accounting standards compatible and are the reported results truthful and complete?

  • Report this Comment On January 29, 2011, at 3:09 PM, Beeru10 wrote:

    Unfortunately, this commentary about Indian economy is coming from someone who doesn't understand anything about India - everything you read about Indian companies is not true including the numbers. It is not correct information what you read in Indian news papers. I would like to hear about indian companies from someone who is on the ground and been there from some time. Sorry.

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