India: Asia's other economic powerhouse

India's problems are obvious and enormous: crushing poverty, persistent corruption scandals and a crumbling infrastructure that is decades out of date.

At first blush, India's economic virtues are less apparent, but they are tremendously compelling, particularly over the long term.

As China's roaring economy has been the pacesetter for recovery from the global financial crisis, the world's most populated country has garnered the bulk of international attention. From its undervalued currency to its mushrooming modern super-cities to its yawning trade surplus with the United States, China has dominated the attention of the world's financial markets this year.

Yet 2011 may finally be the year when people wake up to the potential of the other Asian economic superpower.

India currently enjoys three major economic attributes that China lacks: democracy, favourable demographics and a preponderance of English speakers, which helps ease business dealings with the West. In 2011, these advantages could begin to bloom.

As Raghav Bahl, the founder and controlling shareholder of Network 18, India's largest television news and business network, argues forcefully in his new book Superpower? The Amazing Race Between China's Hare and India's Tortoise, India has the mettle and resources needed to eventually close the economic gap with its powerful northeastern neighbour.

For starters, Mr. Bhal notes, India is a democracy, the world's largest, in fact. Compare that with China, where 24 members of the Central Politburo are tasked with charting the course for a nation of 1.3 billion people. The primary driver of much of China's social, political, fiscal and monetary policy is preventing social unrest and keeping the Communist Party of China in power. Although admittedly flawed, India's democratic system aims to elect representatives that will draft the best policies for the people and the country, not the political party they belong to.

As international objections to India's nuclear weapons program have diminished, world leaders have begun flocking to India for diplomatic visits that are far less politically charged than missions to Beijing. India's Parliament in New Delhi, currently led by Manmohan Singh, who was the architect of India's key financial reforms in the 1990s, is now a must-visit location for global dignitaries.

In just the past two months, Prime Minister Singh has entertained U.S. President Barack Obama, French President Nicolas Sarkozy, China's Premier Wen Jiabao and, most recently, Russian President Dmitry Medvedev. Reinforcing India's rising political and economic might, Mr. Singh has also visited Japan and Germany this year, rounding out his country's engagement with most of the world's major economies.

The Indian Prime Minister even found the time to come to Ottawa this year following Stephen Harper's first trip to India in November, 2009.

Although Canada has yet to sign a free-trade agreement with any Asian countries (including South Korea and Singapore, where talks have dragged on for years), it began negotiations with India in November. If realized, Mr. Harper's government has said a free-trade agreement between Canada and India could be worth $6-billion a year for each country. (Despite Canada boasting more than one million residents of South Asian descent, two-way trade with India was just $4.2-billion in 2009. Trade with China was about $50.5-billion.)

India also has demographics on its side. It will soon dwarf the rest of the world when it comes to its working age population - people between 18 and 65 who are contributing members of society. Compared to North America, Japan and even China, India is an exceptionally young country. The majority of its population is less than 30 years old and by 2020 the average age will be 29, compared to 45 in Western Europe and 48 in Japan, according to a recent report from the Canadian International Council.

China's one-child policy has contributed to an aging population. Unless radical changes are made, China's work force growth will end by 2030, and, like much of the rest of the world, the burden of looking after retirees will soar.

In just nine years, by 2020, the United States could be short 17 million people of working age, China 10 million, Japan nine million and Russia six million. At the same time, India will have a surplus of 47 million workers. If India can achieve the massive task of improving health care and educational services for these workers, it is sure to become an economic powerhouse.

While much has been made of China's burgeoning consumer class, India is already endowed with a hefty middle class whose size has been estimated at about 200 million people - the entire population of Brazil.

India also enjoys an abundance of English speakers, a fact that could help facilitate more business and trade with the West, whose companies and politicians have often struggled with cultural and language challenges in China.

India represents the largest English-speaking ethnic community in the world, with about 350 million Indians displaying a reasonable proficiency in the language. Moving beyond its troubling colonial roots, English has become the language of upward mobility in India, used by cab drivers, university professors, lawyers and in business. Eighty per cent of India's two million college graduates are English-speaking.

Despite the myriad of challenges faced by its 1.1 billion people, India is expected to record the second fastest growth of the world's major economies in 2010, expanding by 9.7 per cent, according to the IMF. (China's economy will grow by 10.5 per cent, the IMF says.) In the third quarter, India's economy grew by a more-than-expected 8.9 per cent, with household spending and investment driving the expansion. According to London-based Capital Economics, India's economic upswing will stay in good shape over the coming year.

"The structural development story is overwhelmingly positive and the government in the end will deliver on the reforms needed to ensure that the private sector continues to thrive," Vishnu Varathan, the firm's Asia economist, said in a recent report.

India's government has finally come up with a plan to tackle its woeful infrastructure deficit, which Prime Minister Singh has said is choking economic growth. Government investment in roads, ports and rail could hit $500-billion (U.S.) for the five years ending in March, 2012. In the following five years, the prime minister hopes to invest another $1-trillion dollars in infrastructure with half the funds coming from the private sector.

Still, the headlines in India's vibrant newspapers (both in Hindi and English) are currently dominated by corruption scandals involving several officials both in the public and private sectors, including the telecom minister, Andimuthu Raja, who resigned amid allegations related to wireless spectrum sales and has denied any wrongdoing. But the very fact that the corruption scandals have brought public censure is cause for optimism, according to analysts at Hong Kong's GaveKal-Dragonomics, who say that India's banks may present an opportunity when compared to China's massive state-controlled lenders.

"Although India's public banks also have guidelines forcing them to lend to priority sectors, Indian banks are clearly more mature, and more accustomed to dealing with marketplace realities," the research and advisory firm said in a note to clients.

"And the recent loan-for-bribe scandals should improve conditions, as they demonstrate that there is now a penalty for corruption."