The last 25 years have been all about the rise of China. Although political freedom never came, the country prospered initially via export led growth combined with huge fixed asset investments and then a huge jump in consumer demand driven by a huge uptick in per capita GDP. Currency, interest rates, subsidies, copy cat technologies etc all were used to the maximum advantage in becoming the factory to the world. Entrepreneurs were allowed to prosper and various crises related to shadow banking, local government debts, real estate bubbles etc were handled without derailing the economy. However recent actions by the Chinese Government in trying to get back to being more of a Socialist State and putting restrictions on businesses etc at a time when the Chinese Economy is faltering will be a game changer for the future.
Many of the regulations on the operations of various businesses and now even Casinos in Macau have started to make global companies sourcing out of China jittery. Over the years China became the single source of procurement for many companies driven by their low costs and economies of scale. However the recent swing in political thinking in China seems to be more designed towards getting some sort of old style communist rule back where equality is achieved via redistribution rather than overall growth. This coming at a time when the population has started to age due to the erstwhile single child policy. China has another very serious demographic problem due to sex-selective abortion and its one-child policy, resulting in a ratio of 120 boys for every 100 girls. A big part of the growth in China was due to its low labour costs and social costs. All that is changing rapidly now with a shrinking labour force. The recent changes in the one child policy will take more than a decade to show any results.
The recent clampdown by the Chinese Government on businesses across the board and asking them to be more responsible towards the have nots is effectively the end of Capitalism as it existed in China. Most companies compromised on human factors while sourcing from China. However if companies and the rich are asked to redistribute their wealth then it’s a totally different ball game and a dangerous one. Maybe President Xi wants to rule forever, is aiming for global military domination etc and needs public support for that. Who knows what their end game is but its not going to be good for the Chinese Economy for sure as the Communist Economic Ideology has always failed.
All this is happening at a time when the Chinese Economy in any case has been slowing down rapidly and this could be a trend for some time to come. FDI inflows and new business start ups in China should suffer going forward and create further downside for the economy. Most of the dictates that are being implemented in China would have been challenged in courts in any vibrant democracy and rule of law would have operated. However not in communist or dictatorship states.
While all of this is happening in China what we see happening in India is completely the reverse. After focussing largely on the Socialist agenda during the first 6 years of his term where decisions like Demonetization hurt the economy substantially the actions have changed over the last couple of years slowly but surely. This has been combined with the coming of age of many new generation businesses in India and a huge flow of FDI into start-up’s, established unlisted businesses as well as established businesses. The IBC framework combined with a revival in commodity industries and steady clean-up over a period of nearly 10 years has created a much stronger financial system in India with balance sheets reasonably strong even after the hit due to the pandemic.
The biggest strength of India despite its critics is the vibrant democracy where the courts are there to protect the rights of people as well as businesses. There is a transparent election system where the rulers of today can be thrown out anytime by the people whenever the elections take place and the right to freedom is strong.
The massive decline in Chinese Equities including those which raised huge amounts by doing IPO’s in the USA is a big concern for investors. Any Private Equity fund will be very wary of putting money into China any time soon. Obviously the second largest economy cannot be ignored by anyone, however there is going to be a phase of wait and watch for the next two years.
However India on the other hand is going totally the other way. We have already seen many companies in the Textiles and Chemicals segment benefit due to a shift out of China or people looking for second sourcing bases. One of the biggest disadvantages in India was always about high capital costs due to very high interest rates. That part is also competitive now and many Indian commodity companies in Steel, Plastics and other commodities have been able to clean up their balance sheet and make exceptional profits. The most surprising part also has been the resilience of the Indian consumer considering the pandemic hit impact on earnings, jobs, businesses as well as inflation. So if consumer demand has held up so well during such trying times then the long term future should be brighter.
Indian Technology companies have benefited due to the rapid moves on digitization. This is also benefiting the Indian Economy disproportionately but is not seen at this stage so openly. The culture of entrepreneurship has always been strong in India. Most large Indian companies be it Infosys or Wipro in IT, All Pharma Companies, Consumer companies like Asian Paints or Pidilite, Many large private sector banks, Automobile or Retail companies all have been products of entrepreneurship. Now with the success of new generation companies and IPO’s like Zomato or the kind of valuations being talked of for Byju’s etc we are seeing a huge new generation of youngsters getting inspired to do something of their own and build something. This combined with an easy availability of capital for the germination of ideas will lead to a bigger boom over the longer term.
The government is also combining socialism with creating an enabling environment for investments and growth. India is at a stage where all legs of the drivers of the economy be it consumption, fixed investments, or exports all will start contributing towards growth. Democratic India will become a preferred investment destination for money looking for yield as the other biggest destination i.e. China becomes less attractive. Capital availability will drive growth strongly.
There will be challenges related to bureaucracy, high inflation which has always been an issue as soon as the economy starts growing strongly, job creation which has been very slow (We need more than 1.5 Crore new jobs just for people who are entering the workforce every year) etc. However directionally the next 10-20 years look much better. For the last 15 years we have been looking towards getting near a double digit growth. This could become a reality as all building blocks fall into place over the next few years.