MENU

3 Signs India Isn’t China Yet

India is on investors’ radars. Shares reached a two-year high this month as international investors look to South Asia for emerging economy growth. But does India have what it takes to sustainably grow its economy? I’ll use three different indicators to contextualise four different companies and let you be the judge.

1. GDP per capita
Let’s admit it: money matters. Gross domestic product per capita is one of the simplest metrics, but it’s also one of the crudest. Even though it’s equal to the average income, it doesn’t tell you much about the rising middle class or the purchasing power of Indians. Currently, India’s individual income is US$1,489 a year. Even though India’s GDP per capita has improved nearly 50% in the past 15 years, but it still lags far behind the world’s average earner.

To get some perspective, Indian automaker Tata Motors  (NYSE: TTM) has found fame and fortune through its US$2,000 Tata Nano, the world’s cheapest car. Although the average Indian would have to use 16 months of their salary to buy this car, India’s 1.2 billion population creates a lot of customers. For fiscal year 2012, Nano sales increased 5.8% to 74,521 and, more important, Tata enjoys 100% market share in the “micro” vehicle category.

2. Doing business

For 10 years, the World Bank and International Finance Corporation have published a Doing Business report to provide objective measures of 185 countries’ regulatory frameworks. The analysis examines the “user friendliness” of the regulatory process, as well as regulatory enforcement .

For 2013, India came in 132 out of 185. Even worse, India was also one of just two countries where business is more difficult to conduct today than it was in 2005 (the other was Zimbabwe, where inflation reached 79.6 billion percent in 2008).  But it’s not all bad news. India created its first credit bureau in 2004, and has since made significant strides in improving international trade and citizen taxpayer rates.

But companies headed to less regulated areas need to recognise that employee safety, product quality, and environmental stewardship cannot be sacrificed.  One such example is Dow Chemical  (NYSE: DOW).  It acquired Union Carbide in 2001 (Union Carbide is infamous for a gas leak tragedy in Bhopal, India in 1984), and Dow managed to evade direct liability for the event because of India’s loose regulatory environment.  However, Dow’s brand is now (also) infamous for corporate irresponsibility.

3. Human Development Index (adjusted and unadjusted)
If you’re looking for a metric to measure a society’s sustainable standard and quality of life, the United Nations Development Programme’s Human Development Index is the biggest name around.  This index incorporates wealth, health, and education.  While it isn’t perfect, it does say a lot about the future employees, consumers, and citizens of a country. For 2011 (most recent data), India falls in 134th place out of 187 countries.

Even worse, the country’s inequality-adjusted index drops the country’s rating by around 30%. Although advancements have been made to move away from the caste system and other historical inequalities, cultural and religious barriers still hold back significant portions of the country’s population. Most recently, gender issues erupted when the gang rape of a 23-year-old woman brought the government’s discrimination against women to the forefront.

India’s health index is the country’s strong point, while education continues to lag. Even though life expectancy tops 64 years, the average adult has only 4.4 years of schooling. Education is an important backbone to any country, but especially so for India’s technology-based aspirations. Infosys  (NYSE: INFY) 156,000 employees have helped the company grow sales more than 800% in the past 10 years, but the company is facing increasing competition.

Likewise, consulting firm Accenture (NYSE: ACN) looks to India for many of its outsourcing solutions. It employs 70,000 people across seven cities, and works in 14 sectors from media to logistics. Over the past 10 years, both companies’ shares have beat the S&P 500‘s returns.

3 Signs India Isnt China

And while India’s low cost of living and large labour supply currently fatten these companies’ margins, education and health need to improve to keep the country’s population competitive.

The proof is in the people
It is easy to get excited about an “emerging middle class” and international growth stocks, but deeper analysis can help investors understand the true viability of their investments’ aspirations. The China bubble burst humbled many shareholders and reminded us that it takes both a well-managed company and a well-managed country to move markets higher. Arm your investing thesis with these three metrics and head forth a more informed, more confident, and more Foolish investor.

 

The Motley Fool’s purpose is to help the world invest, better. Click here now for your FREE subscription to Take Stock — Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock — Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead. 

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. 

This article was first published on Fool.com. It has been updated.