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March 12, 2021 at 12:52 PM
What You Need to Know
- In the past decade, the MSCI China Index had annualized gross returns of 7.8% compared with MSCI India's 3.4% — both below the MSCI All World Country Index's 9.7%.
- Regarding prospective stock market returns, India’s low starting point relative to China may give it an advantage.
- As for e-commerce penetration, it's reached about 25% of retail sales in China, above that of the U.S., but is under 7% in India.
By any measure, China and India have been economic success stories over the last decade. From 2008 to 2018, for instance, China’s per capita GDP roughly tripled, while India’s per capita GDP roughly doubled, according to the most recent data from the World Bank.
In contrast, many Western economies, including Canada, France, Germany and the U.K., experienced no growth in per capita GDP — and consequently in the average person’s standard of living — during the same period. Interestingly, stock market returns didn’t necessarily match emerging markets’ lofty GDP growth rates.
In the 10 years ended Dec. 31, 2020, the MSCI China Index (as measured in U.S. dollars) produced an annualized gross return of 7.8% while the MSCI India (USD) produced an annualized return of 3.4% — both well below the MSCI All World Country Index (USD) gross return of 9.7%.
Yet we see a compelling case as to why the future may look very different from the past — and why India may materially outperform China over the next decade.
(In the interest of full disclosure, NextFins — the firm that I co-founded — operates a fund that tracks the Nifty Financial Services 25/50 Index, which tracks the top 20 financial services companies in India.)
People, Policies & Technology
A major factor in projecting the long-term growth of any economy is demographics. India has a young population, with about 40% of its citizens under 25 years old.
This means that India could be adding to both its labor pool as well as to its overall consumer demand for goods and services for decades to come.
India’s young demographic may also mean that relatively fewer funds will be required to support retirement costs for older generations, which may lead to the government being able to spend more on infrastructure and education.
A JPMorgan research report from January 2021 estimates that India’s dependency ratio (which is the ratio of the population ages 0-14 and 65 and up as a share of the total population) will not start to increase until at least 2044. In contrast, China’s dependency ratio started increasing at the end of the last decade and is projected to continue increasing for the next fifty years.
The next important determinant of durable growth is whether India’s government can create policies that create jobs for its growing workforce.
Over the last two years, India has introduced a series of pro-growth reforms. Specifically, in October 2019, India cut the corporate tax rate from 30% to 22% and introduced an even lower 15% tax rate for companies setting up new manufacturing facilities.
In 2020, India introduced an incentive program that provides up to 6% back on incremental sales of electronics, auto components, pharmaceutical drugs and electric vehicle batteries that are manufactured in India.
Government policy is also relevant with respect to the large publicly traded companies that are available for global investors. The four largest components of the MSCI China Index (in order of weight) are Alibaba, Tencent, Meituan and JD.com.
