India Overtakes China As New Growth Leader

3/7/2016


Last year, India took the baton from China as the world's fastest-growing major emerging market. India's real gross domestic product rose 7.4% in 2015, surpassing China's growth for the first time in more than a decade. More important, India's growth is expected to accelerate in 2016 and 2017, while growth in China decelerates.

India offers plenty of factors to attract foreign investment. Inflation has slowed in recent years, and the Indian rupee has held up better than many other foreign currencies. India also says it has no plans to boost growth by devaluing its currency, departing from strategies used by China and Japan.

Unlike many emerging markets, India imports most of its commodities; its economy should benefit from low oil prices. Despite rising fuel consumption, India expects to spend 45% less on crude-oil imports in the fiscal year ending March 2016.

Perhaps most attractive: India's demographics. It boasts the second-largest population (1.32 billion) in the world. About half of India's residents are under the age of 25, and an estimated 13 million people enter the work force each year. At the same time, much of its labor force remains unskilled, and women in some areas face a stigma if they work outside of the home.

ASIAN STOCKS LAG
---------- Total Return ----------
Country Index
2016
(%)
1 Year
(%)
10 Years
(Annual.)
(%)
China
(13)
(26)
4
India
(11)
(25)
3
U.S.
(4)
(7)
4
Emerging markets
(5)
(24)
0
World
(5)
(11)
2
Returns as of Mar. 1.        Source: MSCI.

Foreign companies that hope India will supplant China as a major source of growth still face plenty of roadblocks. Some of India's rules prevent it from serving as replacement for China. Foreign companies must comply with religious rules requiring, for instance, that factories locate at least 500 meters from temples. BlackBerry ($8; BBRY) has sparred with Indian officials over technology used to encrypt corporate e-mails, while Facebook ($110; FB) recently ran afoul of regulators over its attempt to offer free internet services with limited access.

Foreign companies are prohibited from opening supermarkets and can only own up to a 51% stake in local chains, limiting their ability to tap into the grocery industry, about one-third of India's consumer spending. Other retailers must ensure that one-third of their products are made locally. For years, IKEA has struggled to gain a toehold in India, while Wal-Mart Stores ($66; WMT) abandoned its plans to open retail stores, instead opting to operate as a wholesaler.

Apple ($101; AAPL) is the latest U.S. company to take a crack at India's retail market. In January, Apple applied for government approval to open retail stores in India and sell its products online. It currently sells devices through Indian-owned distributors and retailers. Apple controls less than a 2% share of India's smartphone market, projected by researcher IDC to overtake the U.S. as the second-biggest market in the world by 2017. Apple said December-quarter sales surged 38% in India, compared to 14% in China. Despite the growth, revenue from India is still less than a third of the company's $18.38 billion from China.

Not to be outdone, Alphabet ($739; GOOGL) expects to launch a low-cost smartphone through an Indian partnership later this year. The company expects more than 500 million Indians to be online by 2018, up from 300 million in 2015. Both Apple and Alphabet are Focus List Buys and Long-Term Buys. Wal-Mart is rated A (above average). Facebook is rated B (average).


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