What separates India from China

Tue, 21 Sep Pre-Open

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The one common factor that entwines through India and China is that both have both recovered strongly for the global economic slowdown. Yet despite the future prospects looking healthy both have different dilemmas to deal with.

Take the case of China for instance. Because its economy has been largely exports dependent, the global slowdown hit its economy hard. The company since then has been trying to focus more on domestic consumption. But that is a structural shift that will take some time to bear fruit. In the meanwhile, a prolonged recession in the US and Europe would once again start to have a negative impact on the Chinese economy. Already after reporting strong growth in the first half of 2010, experts are of the view that growth in the Chinese economy will be much lower in the second half of the year.

China also has another problem to deal with. That of a bubble forming in asset classes. Readers would recall that China had introduced a massive stimulus package to fuel its economic growth after it slowed down as a fallout of the global crisis unfolding. This was followed by indiscriminate lending by banks to the property market. This led to property prices reaching unjustifiable levels. Since then the Chinese government has introduced measures to cool down the property market. But at present the two issues that threaten China is a prolonged recession in the developed world and formation of asset bubbles.

India is a different matter altogether. The big problem that is hampering India currently is persistently higher inflation. Especially on the food front. This has led the RBI to continuously adopt tightening monetary measures. And this is likely to continue till the inflation levels come within the central bank's comfort zone. The other problem that the Indian government faces is the burgeoning fiscal deficit. The government has laid a roadmap for reducing the deficit but it remains to be seen whether it will be able to stick to its agenda. The good thing for India though is that domestic consumption has been healthy. This has then insulated India better from a slowdown in the West than China.

But stock prices in India have been zooming. Although the Indian growth story remains intact, valuations are beginning to look rich. This is even as a flood of IPOs are hitting the market and FIIs are pumping money into the markets in droves. It is important for investors to not get carried away by the tide but do some independent thinking that will help them generate returns most suited to their risk appetite.