India - Jeff Thredgold / Tea Leaf

Reference is frequently made to the BRIC nations…Brazil, Russia, India, and China…four nations with considerable geographic size, large populations, and enormous economic potential. The past few years have seen China garner most of the attention, as that nation of 1.3 billion people just surpassed Japan as the world’s second largest economy.

Brazil also draws considerable attention, given its rise in the agricultural and energy areas. Russia also draws attention as an energy and commodity player, but perhaps equal attention for the corrupt nature of the political structure and the need to pay bribes to get most anything done.

And then there is India…

This nation of 1.2 billion people has what is now the global community’s 10th largest economy. While China draws praise (in some circles) for its ability to grow the economy and move closer to being a world class player in many sectors, India struggles.

Economic reforms unleashed 20 years ago created the potential for a world class economy. While economic growth has remained “solid” in recent years, the Indian economy continues to face major challenges.

In Contrast

The media likes to paint China and India with the same brush. They are actually very disparate economies.

China is an export-based economy with a current emphasis on internal investment to minimize volatility tied to exports. Indiais an internal demand economy with aspirations of building exports to the world.

One might think that global investors are just “chomping at the bit” to push massive amounts of investment dollars into this nation of enormous potential. They would be wrong.

Investors Retreat

During 2008, foreigners poured twice as much direct investment into India…$33 billion…as Indians plowed into businesses overseas. By 2010, that changed in a big way. Indian citizens invested $40 billion abroad…twice as much as foreign investment in India (The Associated Press).

Capital outflows by foreign investors from Indian stocks have been massive, with investment down by more than 95% in 2011, versus 2010 (www.dbfsindia.com). The potential allure of sizable investment gains in this newly emerging nation has been offset by massive government corruption and political paralysis on a grand scale.

Inflation has been a major issue in recent years, with prices rising more than nine percent in 2011. The Reserve Bank of India, that nation’s central bank, tightened monetary policy 13 times in 2010 and 2011 in an attempt to slow inflation pressures. Such aggressive tightening was the fastest since 1935 (www.bloomberg.com).

The Indian population accounts for one of every seven people on the planet. By contrast, the American population accounts for less than one of every 20 global citizens. Various estimates suggest that Indiacould overtake China by 2030 to become the planet’s largest as measured by population (Herman Trend Alert).

Indian economic growth this year could slow to around seven percent after inflation. Such growth, while impressive when compared to that of more developed nations such as the U.S., will not be enough to lift the hundreds of millions of citizens still subject to severe poverty.