India=serviços versus China=produção

[SMALL]

February 18:Country Risk - India, Another China in the Making?

Author: RBC Financial Group Economics Department
Date: 2005-02-18


For a country its size, India gets surprisingly little attention from markets, but attention is increasing after China's boom opened the eyes of the world to the potential influence of large emerging markets.

For a country its size, India gets surprisingly little attention from markets, but attention is increasing after China 's boom opened the eyes of the world to the potential influence of large emerging markets.

India 's economy has enjoyed strong growth alongside declining inflation and interest rates, a current account surplus, declining external debt and healthy foreign exchange reserves.

Challenges remain in the form of high government deficits, a pressing need for infrastructure renewal and the growing demands of India 's poor to share in the good times.

Fears abound that India 's growth will soon bring about epic shortages of raw materials. We find that, while India will definitely be an important source of demand in the medium-term, there is a low chance it will be the catalyst for near-term shortages and higher commodity prices. It is still too small a global player to be the driver of shortages the way China has been in recent years.

India falls short of China in several other areas as well. India is still farther back on the development path and is not yet as integrated into global trade and capital markets, suggesting a still-minor influence on the global economy.

Popular theory holds that what China is doing to global supply chains for manufactured goods, India is doing for services. But while India has made tremendous strides in recent years and holds the high ground among emerging markets in high value-added services exports, offshoring is producing fewer benefits for India than is assumed and proportionately more for countries doing the offshoring.

The medium-term outlook for India is extremely compelling. Sound economic management and healthy population and income growth should see it become a key market for raw materials and finished goods. As the services outsourcing trend gains steam, India should also enjoy rapid growth that occurs in a parallel rather than competing fashion with China .