In a number of other global commodities, China and India will make up 40-60 per cent of global demand by 2020
Rohit Chawdhry

The Chinese and Indian economies throw up a series of mind-boggling statistics in terms of market size, growth and economy of scale available nowhere else on the planet. The shift in global production flows that have made China a major manufactured goods provider and India a key exporter of services, has taken place on a scale and timeline with no rival in world economic history.

US$16tn per year – that is the forecast for the combined GDP of China and India by 2020, with its share of world GDP rising to 17 per cent from the current seven per cent. In nominal terms, China will move from being the sixth largest economy to the second largest by 2020 whereas India will move from 14th to seventh. In 2020, China will be bigger than the US today and India will be bigger than Germany today. However, in purchasing power parity (PPP) terms, China will be twice the size of the US and India will be nearly half the size of the US. Per capita incomes will enjoy more than ten per cent annual growth – only to be surpassed by consumption growth, thanks to rising credit penetration.

Both these Asian giants are getting younger, more urban, nuclear and rich with more than 250mn people being added to the productive 15-64 age bracket by 2020. The region is well set to reap a rich demographic dividend, enabling it to assert its place in the emerging world economic order. More importantly, labour force participation rate, lots of it due to the female population, is adding at least one per cent in real terms to the real GDP growth of both the economies. The pick-up and drops by BPOs and KPOs in India is lending a good hand in this regard.

Over the past two decades, China’s growth has predominantly been led by investments and India’s growth has been largely consumption driven. While consumption is likely to be the biggest theme in China in the coming decade and half, we believe investment will likely continue to be the biggest growth driver during the next few years. In India, consumption continues to remain strong whereas investment is likely to emerge as a key driver in the coming years as investment demand picks up momentum. Large investments mean that demand for industrial minerals, metals and machinery will remain strong and will also create huge employment opportunities.

China’s investment has been driven by the state’s focus on creating worldclass infrastructure over the past two and half decades. A high savings rate and strong FDI have supported high investment rates in China. India’s investments have been significantly lower than China and investment has remained flat at about 23 per cent of the GDP pre-2000 while that for China has remained around 30 per cent in the same period.

At the current levels (in 2005), investment is around 42 per cent of GDP for China. Critics say that India’s investment growth has been lagging behind that of China. To tackle this problem it is imperative to estimate the investment levels in India. Unfortunately, figures on investment growth for India are only known with a two year plus lag. For example, the last available official investment figure for India, 30.1 per cent of GDP, is for 2004/5. This ratio is a full three percentage points above the previous highest recorded level, 27.6 per cent (1995/96). Current information on several pointers to total investment spending are, available on a current basis e.g. growth in non-food credit, bank credit to industry, capital spending by major corporates etc. According to regression estimates, the share of investments in India’s GDP for 2006 works out to 38 per cent. These are close to the Chinese levels. At this rate of growth, India’s growth in investments over the last two years has been one of the fastest in world economic history. Said differently, most of the growth has occurred in the last two years.

The driving force
So what has been causing this fantastic growth in the two countries? The middle class.
So expect growth in infrastructure to sustain over the next decade or so. India’s infrastructure is also catching up with that of China. India’s infrastructure growth is comaparable to China’s in 1994. Clearly, there will be periods of economic over-heating but that is a normal course every economy goes through while it is industrialising.

Catch-up due to globalisation
Forces of globalisation are making these two countries catch up with the rest of the world faster than one would have imagined some time back. One of the amazing catch ups that is occurring is in the Indian industry. It is surprising to note that despite having a strong industrial base, India’s industry has never ever done a ten per cent decadal growth (based on moving average).

Several other countries have done this before. Countries having achieved this performance include the likes of China, Japan and Korea to Bangladesh, Mali and Uganda. India is not yet there. But over the last year, this has started to change. India’s industrial production has started to clock ten-11 per cent from the earlier average of six-seven per cent.

That is a shift. It is noteworthy that India has lagged behind Chinese industrial growth primarily due to the middle kingdom’s significantly lower real interest rate regime than India’s. This is no longer the case. Real interest rates in India have now come down by 600 basis points over the last six years. This has started to benefit the industry.

The world in 2020
So what would the world look like in 2020? Or rather, how would India and China combined look like in 2020? Envisage an India and China consuming half of the total global steel production. Or one-third of the total mobile subscriber base in the world. A capacity addition in power generation that would equal 1.5 times the total power capacity addition that the US has added in the last 55 years. A skincare market that would equal eight times that of the US and 23 times that of Germany. Increase in banking sector loan-assets in the next 15 years equalling two times that of Japan. The combined oil consumption is expected to rise to 18 per cent of the global consumption in 2020, up from the present levels of 12 per cent. These are huge numbers – Period.

Opportunities galore
In a number of other global commodities, China and India will make up 40-60 per cent of global demand by 2020. India’s investment cycle will further accelerate in the coming years, whereas, in China, consumption is lik-ely to dominate economic growth. Investors can take advantage of this shift in global economic order by buying large global companies with strong China and India focus. Pioneers include Nokia, Samsung, Honda, Toyota, ABB, Microsoft, Sony and Unilever. Companies with the right strategies and resources in place to grow their businesses in the two countries will benefit at their competitors’ expense.

Quite simply, we are bearing witness to a unique and profound economic transformation that will continue to reshape the global economic and social landscape. The investment conclusions from these shifts are just beginning to be understood and represent a break from the past, in which China and India were simply lumped into the category of emerging markets. A transformation of this size has never happened in history and perhaps never will.

the author is portfolio manager, Oxus investments, new delhi, india Tel: +091 9899048845 Email: rchawdhry@gmail.com