China is big. It is the second largest economy in the world. It is also the most populated economy in the world. India is always compared to China and in such comparisons, comes out way below China is many factors. Infrastructure is one big factor that India comes a distant second to China. In economic terms India falls way behind China in growth, inflation and deficits. China is growing at 7.8% with CPI inflation at 3.3% while India is growing at 5% with CPI inflation at 10.09%. China’s current account surplus is expected at around 2.6% of GDP for 2013 while India’s current account deficit is expected at around 3% of GDP for 2013-14.
It is common for many Indians to comment “Look at China and look at us, we are nowhere in the picture!”. However in one most important area India is way ahead of China and is equal to or better than many rich economies. India is definitely one of the best countries in the world in the way the financial sector is managed.
China has just finished its annual meeting of the ruling political party and has announced a slew of path breaking reforms. China’s reforms include social and economic reforms. On the social side, the one child policy has been done away with while on the economic side reforms include removal of caps on interest rates, Yuan convertibility, improving reporting standards, making local governments more accountable for its finances and freeing financial markets to make the economy a more market driven one. Reforms include larger foreign ownership in Chinese companies.
India is fifteen years ahead of China in economic and financial market reforms. Interest rates in India are market determined with the RBI doing away with ad hoc government funding in the late 1990’s. Government borrowing costs are market determined with the government bond yield curve being the benchmark curve that determines the borrowing costs for state governments, municipal corporations, banks and corporates. The government bond market is one of the most liquid in Asia, is well regulated by RBI and fully electronic.
The banking system in India is well regulated and banks reporting standards, reserve ratios and capital adequacy hold the system strong even in the face of adversities such as the global financial market collapse in 2007-08.
On the equity market side, reporting standards in India are high and with many companies being listed abroad or have borrowings in US Dollars and other currencies, reporting standards are global. True many companies have low levels of corporate governance but markets do punish these companies forcing them to improve their governance standards.
The technology used by the primary stock exchanges, NSE and BSE are amongst the best in the world. Given that Indian exchanges embraced technology in the late 1990’s, technology is more advanced than even countries like US where exchanges started using technology much earlier and have yet to upgrade fully to the latest technology platforms.
The Indian Rupee is free float on the current account and that leaves the currency to be largely market determined. The Rupee depreciates and appreciates on market forces unlike the Yuan that is a managed peg. China’s current account surplus is a question mark due to the managed peg value of its currency.
SEBI as a regulator has come a long way since it was formed in he early 1990’s. SEBI may have its ups and downs but it has well formed laws that govern capital markets. The regulator has largely been responsible for the transparency in Indian markets.
Chinese data is always a big question mark due to poor transparency standards. Hence what is reported is not always what is the true facts and figures. India’s reporting standards may have issues but the fact is that the reports are out there for everyone to see and analyse. It is easier to put out independent data analysis on India and markets can choose the right data to look at.
China has a long way to go to prove to the world that it is committed on reforms while India is already up there with the best on economic and financial market reforms. The clamour for reforms in India is largely on two factors a) Subsidies and b) Tax. The new direct tax code and implementation of GST (Goods and Service Tax) can address at least 75% of the tax reforms while on subsidies it is still a question mark.
India has largely allowed FIIs to invest in equities and has increased debt investment limits from USD 2.5 billion in 2003 to USD 81 billion as of 2013. FIIs own at least 48% of free float market cap in India as per a Citigroup report. FIIs like India due to its vibrant financial markets. FIIs will go to China as it’s a huge market but they will definitely give higher valuations to Indian equities given that they know what they are buying into.
The next time someone says “Look at China” please point out that India is way ahead.