Not all giants are the same

When an advisor suggests exposure to the booming Asian economy, most clients will automatically think of China. Mention technology, they may think of the hardware capitals like Japan or Korea. But if you’re looking for a high-tech service sector, India could be the place to be.

Investors are often tempted to compare India to China, but their economies are very different. True, both are emerging economic superpowers and together account for about 40% of humanity. But while China’s growth is predicated on its cheap labour force being put to work in the manufacturing sector, India’s history has led it down a different path.

“It’s a story of what some call parallel economies,” said Wendy Dobson, director of the Institute of International Business at the Rotman School of Management. “One economy has nearly 750 million of one billion people who still live in poverty with high illiteracy rates. The other modern, urban economy has a growing middle class, and a growing number of world class businesses known around the globe.”

Speaking at the Toronto CFA Society’s conference on investing in India, Dobson said India spent decades protecting its domestic economy, using an ungainly collection of import restrictions. During the technology boom of the late 1990’s, these controls limited India’s ability to compete abroad, but these same controls were not in place on the services sector. To avoid missing out entirely, India’s technology industry focused on software instead.

In a workforce of 400 million people, only 7% (or 28 million) are in the manufacturing sector and the export of goods account for only 9% of GDP. A “mere” 1.5 million IT engineers create 7% of the country’s GDP, according to Dobson, and the export of services accounts for almost 60% of India’s economic growth since trade liberalization started in 1991.

“Yet this dynamic sector has limited linkages to the domestic economy,” she says. “During the rapid growth of its output in the 1990s, its share of employment actually dropped.”

On the positive side, the financial services sector is robust, according to Devdatt Shah, co-founder of Cindus Advisors and the former CEO of ICICI Securities. He admits that India embarked on its reform measures about 15 years later than China, but points out that India already had a more developed Western-style financial system in place, giving it a 50-year head start in that respect.