India and China are frequently mentioned in the same breath; they are neighbours, both have populations of more than a billion, both have enjoyed fast growth in recent years contributing a joint 30% to global growth since 2001, and both are poised to be in the world’s three largest economies in the twenty-first century. But to date their impact on the commodity markets has been quite different.
For most commodities Chinese demand far outweighs that of India. China is the world’s number one consumer of all the major base metals and either first or second (after the U.S.) for most of the energy markets and agricultural products, (with the notable exception of coffee where it is ranked 45th).
Meanwhile India’s ranking generally hovers between five and fifteen for the major metals. It has a greater presence in energy and agricultural commodities, generally ranking in the top half dozen. The Indian production base for agricultural commodities is large but its international trade is modest.
Typically however China, which has a population which is 20% more than India’s but three times the GDP, consumes anywhere from six to twenty times as much as India in metals, two to five times as much energy and more than twice as much cotton and rubber.
The only exceptions to Chinese supremacy over India are in the tea and sugar markets and in gold and diamonds. India is the world’s largest consumer of gold accounting for 23% of world demand in 2005, and it is the third largest consumer of diamonds after the U.S. and Japan.
Why Are India and China so Different?
A book published recently by Edward Luce, the Financial Times’ bureau chief for South Asia from 2001-2005, suggests some interesting answers as to why the two countries are so different despite starting at a similar state of development some 50 years ago when they had roughly equal incomes per head (and also much the same as Korea’s).
The rather long-winded title of the book, “In Spite of the Gods: The Strange Rise of Modern India,” is also its main thesis; the rise of modern India has been unusual. While India is now expanding rapidly, and has been since 1991, it has not followed the typical developmental pattern of most countries.
China has developed in much the same sequence as most western economies have done. It began with agricultural reform, moved to low-cost manufacturing, is now climbing up the value-added chain and will probably eventually break into the internationally tradeable services on a large scale.
India meanwhile has grown from the other end. The service sector was more than half the economy in 2006, a similar figure to mature economies, yet there has been no agricultural reform (India’s average yield per hectare is half that of China) and no broad-based industrial revolution.
The country’s economy is now booming but it is a lop-sided or a multi-speed economy. The images of the new Indian economy, with its successful IT sector, its offshore call centres, its Bollywood film industry and its successful communities outside India in the U.S., U.K. and elsewhere, (there are several thousand Indian millionaires in Silicon Valley), are indeed a reality. But they are only a small part of the whole picture.
The GDP per capita in India is still just over $700 compared to China’s $1,700, (Korea’s $16,000 and the U.S.’s $44,000). India is home to over a third of the world’s malnourished children. The average life expectancy (63 years) and literacy rate (61% of adults) are well behind those of other developing countries; in China for example the life expectancy is 71 years while 91% of the adult population are literate.
As Luce points out less than 7% of India’s 430 million strong labour force is in the formal economy, and only 35 million pay income tax. The remainder are in the villages, “milking the cow, making up the armies of mobile casual farm workers, running street stalls etc.” Twenty-one million of the 35 million people working in the formal sector are employed by the government leaving just 14 million in the private sector of which just one million are in IT. Seven million work in the manufacturing sector compared with 100 million in China.
So why it is thus? Why has the service sector been so successful and why is the manufacturing sector so small? It is not possible here to begin to do justice to the full historical, religious, economic and political analysis presented by Luce, or to his assessment of the enduring legacy left by three key figures of the twentieth century; Gandhi (who among many other things was anti-materialist and saw the village as the building block of society), Nehru (who sought to build a self-sufficient state-dominated economy) and Ambedkar. But a few points should be noted.
Luce writes, for example, about the importance of the English language. Since India’s middle classes speak English this has given India a huge competitive advantage over China in the service sector where the ability to converse in the world’s business language makes a big difference.
The success of the service sector can also be attributed to the historic allocation of the education budget, with equal measures devoted to universities and primary education. This has resulted in a society with a highly educated elite but a poorly educated majority. India produces a million engineering graduates every year (compared to 100,000 in the U.S.) but its literacy rate is under 65%. China by contrast has invested much more heavily in elementary schooling for those at the bottom of the social ladder.
According to Luce the Indian manufacturing sector though small is nonetheless competitive and strong. He cites examples in the pharmaceutical and biotech sectors, Tata Steel (turnover $4 billion+) which supplies high quality steel for export, and Gokaldas Exports which manufactures two million garments per month for brand labels around the world. Both of the latter use complex capital- intensive manufacturing and are very flexible, but both have been constrained by labour laws, taxes, bureaucracy; and in the textile example, by regulations to fragment the production lines so that each line is small.
So Will India Be the New China for Commodities?
The growth rate of India has broadly doubled since 1991 when India sharply altered its economic course by dismantling a tight system of controls. It is now growing at 6%-7% pa which is behind China’s growth rate (which is closer to 10%) so it is not yet catching up with China, though it is with most of the rest of the world.
However there are plenty of examples already of what can happen as Indian demand for a product explodes. Take mobile phones. In 2000 India had just 3 million mobile phone users while China was adding that number every month to its subscriber base. By the end of 2005 India had 100 million users and was expanding at rate of 4 million per month. Or take diamonds. The market has trebled in just ten years.
Looking ahead Luce forsees many challenges for India to overcome. Besides the overriding need to lift 300 million people out of poverty, he lists challenges related to environmental degradation, Aids and in protecting India’s democracy. But he cites an awareness among policy markets that the best way to cure poverty is through accelerating economic growth.
However Luce also lists a number of opportunities and colossal advantages that India enjoys. Firstly the demographic profile is favourable. From 2010 China’s dependency ratio – the proportion of China’s working-age population to the rest - will start to deteriorate. India’s, by contrast will improve until the 2040s. In the next 20 years the proportion of dependents to workers will fall from 60% of the population to 50% which will give the economy a large ‘demographic dividend’. In 2032 India is projected to overtake China to become the most populous country in the world.
The higher workforce will also boost the savings ratio which will lift investment which in turn will boost economic growth. Already the savings rate has improving from 18% of GDP in 1990 to 26% in 2006. At this level it is still well below China’s 40%, but China’s is falling while India’s is improving. India is projected to overtake Japan as the world’s third largest economy in the 2020s.
Luce’s conclusion is that India is not on autopilot to greatness, but that it would take an incompetent pilot to crash the plane. He asks too whether the Indian tortoise will overtake the Chinese hare? For the investor in resources the question about which country will be the larger consumer is perhaps academic.
India won’t be the new China for commodities tomorrow or the day after tomorrow. It still has a long way to go. But it is already becoming a major consumer of commodities, it has the scale as shown already in the gold sector to be number one, it is gaining momentum all the time, and it looks set to be a crucial prop for the supercycle and commodity prices in the decades to come.
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