Tuesday, February 15, 2005

Democracies do very well over the long term.

The India or China debate has been increasing for sometime now. Strangely, in the past week I have read three articles where India rather than China has come under focus. William Pesek Jr. writes in bloomberg, then Tarun Khanna from HBS and now Malcolm Maiden in the Sydney Morning Herald from the Australian perspective.

I see three trends. One, there has been a large influx of FDI into China in the last decade, many times the size of India. Now it is the time for India to receive it. Second, the growth in China is decelerating for various reasons. Third, India is starting to show more openess and stability in the reform process.

All the three articles look at India from the perspective of missing the boat. Lets check out the Australian perspective.

In October 2003, Goldman Sachs economists Dominic Wilson and Roopa Purushothaman released research that should have changed forever the way Australia saw India.

Their report, Dreaming with BRICs: The Path to 2050, predicted that within 40 years, the economies of Brazil, Russia, India and China - the BRICs - would be larger than the US, Germany, Japan, Britain, France and Italy combined. China would overtake the US as the world's largest economy and India would be third, outpacing all other industrialised nations.

Australia is uniquely positioned to hitch a ride with the two BRICs on its doorstep, as an investor and a supplier of commodities that will fuel their transformation. But while its economic and political relationship with China has flowered, relations with India are growing more hesitantly.

Expanding demand in India for raw materials has helped push two-way trade between the nations from $3 billion to $5.8 billion in the past two years, and Australia is the eighth-biggest direct investor in India, at a rate of more than $1 billion a year. Australian groups including Telstra have outsourced information technology and call-centre work to India's burgeoning service sector, and others including AMP and ANZ have invested directly. Qantas last year resumed direct flights to India that were cancelled in 2001, and groups as large as BHP Billiton and as small as the Unibic biscuit maker are considering investing.

Still, Australia remains a bit player in India's huge domestic economy, which is being attacked much more aggressively by companies from other countries and regions, including South Korea, Singapore and Europe. The Prime Minister, John Howard, raised Australia's profile when he visited India in 2000, bureaucrats say, but three planned trips to Australia by former Indian prime minister Atal Bihari Vajpayee were cancelled for domestic reasons, most recently the snap election in May last year in which his BJP lost power to a coalition led by the Congress Party.

It is 18 years since an Indian prime minister visited Australia, which India's Finance Minister, Palaniappan Chidambaram, says is due to domestic considerations - "the mechanics of getting there and back" and "no reflection of a lack of interest". But a well-placed India specialist in Australia's Government says it is "a challenge to engage India's attention", as India's political and economic ambitions are global in scale and aimed mainly at big northern hemisphere economies.

What is also clear, however, is that Australia's attention has been much more squarely focused on China. Two-way trade in goods and services ran to $27.1 billion in 2003-04, more than four times the Australia-India trade flow. China is already Australia's No.3 trading partner, No.2 export market and No.3 source of imports. India is our No.7 merchandise export market and No.13 trading partner, and the infatuation with China is no bilateral aberration. Global foreign investment into India tripled in the first seven months of 2004 and will top $US6 billion ($7.8 billion) in the year, but that is only about a 10th of the amount flowing into China.

The world's biggest and arguably most diverse democracy has other characteristics that should make it a more natural fit with Australia than China - including widespread use of the English language and a well-developed legal system.

But for outsiders, it presents an intricate and often contradictory picture. Great regional variation underlies the annual 6 per cent economic growth rate, for example. Growth is twice the national average along the coast and in the southern states, where software companies and IT outsourcing are booming. Software exports have risen from $US128 million in 1991 to $US12 billion. Growth is much slower in the northern interior states, such as Bihar.


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