When it comes to emerging markets, China is to Hertz what India is to Avis. For those who remember that classic advertising campaign where Avis poked fun at its status as the No. 2 player in the car rental industry behind Hertz, the analogy here is that China has long been the top dog in the emerging market space while India has been an alluring yet perpetual runner-up. And while China remains the proverbial straw that stirs the global economic drink in so many ways, India could be on the cusp of challenging its neighbor as the fastest-growing economy among emerging markets.
The International Monetary Fund forecasts that India’s gross domestic product will grow 7.4% in 2018 and 7.8% in 2019. It expects China’s GDP to grow 6.6% and 6.4% during those years, respectively, while the overall region of emerging and developing Asia is expected to grow its GDP by 6.6% in both years. By comparison, U.S. GDP is predicted to grow 2.7% and 2.5% during those two years.
And the global consultancy PwC caused a stir last year with a report that said emerging markets will dominate the world’s top 10 economies by 2050, with China and India expected to be the top two in that order, followed by the U.S. Its list is based on GDP at PPP, or gross domestic product at purchasing power parity adjusted for price level differences across countries. PwC posits this provides a better measure of the volume of goods and services produced in an economy.
Based on that measure, China was the top economy in 2016, followed by the U.S. and India in that order. But based on the traditional GDP measures used by the World Bank, the U.S. comfortably remained the world’s largest economy by far at $18.6 trillion in 2016, followed by China at $11.2 trillion. India was seventh at $2.3 trillion.
However you slice it, India is a classic emerging market growth story based on the strength of its demographics. Its estimated population of 1.35 billion is young, with a median age of 27.6, according to the World Population Review. (China has an estimated 1.4 billion people and a median age of 37.1). Parsing the numbers further, half of India’s population is younger than age 25, and two-thirds are less than 35.
Edward Kerschner, chief portfolio strategist at Columbia Threadneedle Investments, notes that India’s economy is about 50% consumption-based, which he says is typical of most emerging markets. (Consumption represents 68% of U.S. GDP.) “What India has going for it is the best demographics of any large emerging economy in the world,” he says.
Columbia Threadneedle offers a trio of exchange-traded funds focused on India’s domestic growth story. What excites Kerschner—and other investors—is the hope that India will leverage its youthful demographics and growing economy to create a powerful, consumption-oriented middle class. “I view India as a coiled spring with this great potential, but it had been held back by corruption and perceptions of corruption,” he says. “There’s a saying that China works because of the government and India works despite the government. I think that has totally changed due to reforms under Modi.”
The Modi Effect
Prime Minister Narendra Modi and his Bharatiya Janata Party (BJP) came to power in May 2014 in a sweeping victory fueled by popular discontent over economic stagnation, corruption and policy gridlock under the long-ruling Indian National Congress party. Modi, who generated controversy as an assertive Hindu nationalist while serving as chief minister of the state of Gujarat for more than 12 years, focused his campaign on reviving India’s flagging economic growth via a business-friendly agenda that promised reforms and less red tape.