China is big. It is the second largest economy in the world. It is also the most populated economy in the world. India is always compared with China and in such comparisons, comes out way below China in many aspects. An example is infrastructure. In this aspect India is no where near China. India falls way behind China in economic growth and control on inflation and deficits. China is growing at 7.8 percent with CPI inflation at 3.3 percent while India is growing at 5 percent with inflation at 10.09 percent. China's current account surplus is expected at around 2.6 percent of GDP for 2013 while India's current account deficit is expected at around 3 percent of GDP.
"Look at China and look at us. We are nowhere in the picture" is a common refrain in India. However, in one most important area India is way ahead of China and is equal to or better than many rich economies. India is definitely one of the best countries in the world in the way the financial sector is managed.
China has just finished its annual meeting of the ruling political party and has announced a slew of path breaking reforms. China's reforms include social and economic reforms. On the social side, the one child policy has been done away with while on the economy front caps on interest rates and yuan convertibility have been removed. Further, steps have been taken to improve reporting standards, making local governments more accountable for its finances and freeing financial markets. Larger foreign ownership in Chinese companies has also been permitted.
India is fifteen years ahead of China in economic and financial market reforms. Interest rates in India are market determined with the RBI doing away with ad hoc government funding in the late 1990s. Government borrowing costs are market determined with the government bond yield curve being the benchmark that determines the borrowing costs for state governments, municipal corporations, banks and corporates. Indian government bond market, one of the most liquid in Asia, is well regulated by the RBI and is also fully electronic.
The banking system in India is well regulated and banks' reporting standards, reserve ratios and capital adequacy hold the system strong even in the face of adversities such as the global financial market collapse in 2007-08.
As far as equity markets are concerned, reporting standards in India have global standards. The reason for this is that many Indian companies have been listed abroad or have borrowed in foreign currencies. True many companies have low levels of corporate governance but markets do punish these companies forcing them to improve their governance standards.
The technology used by the primary stock exchanges, NSE and BSE, are among the best in the world. Given that Indian exchanges embraced technology in the late 1990s, technology is more advanced than even countries such as the US where exchanges started using technology much earlier and are yet to upgrade fully to the latest technology platforms.
The rupee is free float on the current account and that leaves it to be largely market determined. It depreciates and appreciates depending on the market unlike the yuan which is a managed peg. Experts have many a time questioned China's current account surplus due to the managed peg value of its currency.
SEBI as a regulator has come a long way since it was formed in the early 1990s. As a market regulator, it may have had its ups and downs but the laws that govern capital markets are well formed. The regulator has largely been responsible for the transparency in Indian markets.
Poor transparency standards render Chinese economic data suspicious. India's reporting standards may have issues but the fact is that the data are out there for everyone to see and analyse. It is easier to put out independent data analysis on India and markets can choose the right data to look at.
China has a long way to go to prove to the world that it is committed on reforms while India is already up there with the best on economic and financial market reforms. The clamour for reforms in India is largely on two aspects: subsidies and taxes. The new direct tax code and implementation of Goods and Service Tax can ring in at least 75 percent of the tax reforms while on subsidies it is still a question mark.
India has largely allowed FIIs to invest in equities and has increased debt investment limits from $2.5 billion in 2003 to $81 billion as of 2013. FIIs own at least 48 percent of free float market cap in India as per a Citigroup report. FIIs like India due to its vibrant financial markets. They will go to China as it is a huge market but they will definitely give higher valuations to Indian equities given that they know what they are buying into.
The next time someone says "Look at China" please point out that India is way ahead.
Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors.
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Updated Date: Dec 21, 2014 00:07 AM