Emerging or Submerging

Countries whose economies fall into this category, varying from very big to very small, are usually considered emerging because of their developments and reforms. Hence, even though China and India are deemed as the world's economic powerhouses, they are lumped into the category alongside much smaller economies with a great deal less resources, like Tunisia. Both China and Tunisia belong to this category because both have embarked on economic development and reform programs, and have begun to open up their markets and "emerge" onto the global scene. EMEs are considered to be fast growing economies.

What are emerging markets? The term has been with us for a quarter of a century, during which many countries have seen fevered development and in which emerging markets as an asset class have outperformed the developed world. But with recent successes for emerging markets investing, definitions of the sector have begun to fragment.
At one end of the spectrum, there is the vogue for BRIC (Brazil, Russia, India and China) investing, initially championed five years ago by Goldman Sachs. As far as Goldman is concerned, investing in these disparate countries, singled out for the global influence their size should give them, is “not really emerging markets investing”. They are too inter-connected with the developed world.

There are two advantages to the emerging asset class: they grow more over the long term. The MSCI has gained more than 600 per cent since 1988, beating the S&P 500 by 200 percentage points. And they are not correlated with developed markets.

After the recent downturn in the US, the emerging markets have been affected but not so much to derail the growth rates. The developing world had remained relatively resilient against the global turbulence -- particularly given the pummeling many countries took during the Asian and Latin American financial crises of the 1990s and the early 2000s. But as the First World economies now decelerate, demand for the goods and services from emerging markets is being curbed. Many developing countries had only recently been cashing in on the rise in commodities prices.
While they are still growing at rates that would be the envy of developed nations, the signs of a shift in fortunes are sprouting up from Shanghai to New Delhi to Sao Paulo.
In India, the high-tech and outsourcing sectors are softening as they absorb cutbacks from U.S. corporate clients. In China, diminished export expansion is cooling the economy from a growth rate of 12 percent last year to an estimated 9 to 10 percent this year, while the stock market in Shanghai has fallen more than 60 percent since its peak in October. In Brazil, exports slipped last month after surging for months.
Though still awash in oil money, Russia's economy lagged in August, a slowdown that was exacerbated when foreign investors pulled billions of dollars out of the country after its invasion of neighboring Georgia. Last week, the Russians intervened in the currency market more heavily than they had since the late 1990s to prop up the ruble, and the cost to protect government bonds from default shot up. The country's benchmark index on Thursday sank to its lowest since January 2006.

Of all the emerging economies, China and India are at the top two slots. The determinants of economic growth of China and India could be broadly classified as:
· Macroeconomic stability
Inflation; government deficit; external debt

· Macroeconomic conditions
Investment rates; openness of the economy

· Technological capabilities
Penetration of PCs; phones; internet

· Human capital
Education; life expectancy

· Political conditions
Political stability; rule of law; corruption

China ranks well above the mean on macro stability, investment, openness to trade and human capital. Its rankings on technology adoption are more mixed (PC usage is still quite low) and corruption measures are also a little worse than the mean.
India scores relatively well in terms of rule of law, external debt and inflation, but quite poorly in terms of levels of secondary education, technology adoption, fiscal position and openness.

Though China and India seem to heading for a long battle to rein supremacy in the world economic stage, there are a certain factors which in a long term may put India in advantageous position.

Politics
A famous consultant quoted "Emerging markets are places where politics matter at least as much as economics to market outcomes". The Chinese political setup could pose a major threat to this rapidly rising economy of China. The Chinese political legitimacy could be seriously challenged in the event of an economic downturn, crisis over Taiwan, or other issues. That could lead to splits in the leadership, and possible violence, as the authoritarian regime seeks to preserve itself against contrary forces in a violent struggle for power.Experts are pessimistic that we soon will see a move towards glasnost or political pluralism in China. For now, the Chinese Communist Party leaders are united and effective in pursuing continued one party political rule.

Demography
The number of people aged less than 15 years is higher in India than in China. The aging working population of China is one the growing concerns for China. The investment in healthcare by China has been on the rise since they introduced the one-child policy. India now has an edge over China in terms of a favourable demographic transition. It embarked in a gradual manner after 1970 towards a favourable shift in the ratio of the working age to the non-working age population. The ratio at that time was 1.2 : 1 and was 1.5 : 1 in 2000. It is projected to peak at 2.4 : 1 beyond 2030. The overall population growth rate of course should stabilise around 2015 if family planning policies are pursued aggressively. In other words, while there is a positive side to the demographic transition, the negative aspect of aggregate population growth cannot be taken lightly. In 2020, the average Indian will be only 29 years old, compared with 37 in China and the United States, 45 in Western Europe, and 48 in Japan. The demographic process this implies would create a large and growing labour force, which is expected to deliver unexpected spin-offs in terms of growth and prosperity.

Domestic Consumption
The notable thing about India's rise is not that it is new, but that its path has been unique. Rather than adopting the classic Asian strategy -- exporting labor-intensive, low-priced manufactured goods to the West -- India has relied on its domestic market more than exports, consumption more than investment, services more than industry, and high-tech more than low-skilled manufacturing. This approach has meant that the Indian economy has been mostly insulated from global downturns, showing a degree of stability that is as impressive as the rate of its expansion. The consumption-driven model is also more people-friendly than other development strategies. As a result, inequality has increased much less in India than in other developing nations. (Its Gini index, a measure of income inequality on a scale of zero to 100, is 33, compared to 41 for the United States, 45 for China, and 59 for Brazil.) Moreover, 30 to 40 percent of GDP growth is due to rising productivity -- a true sign of an economy's health and progress -- rather than to increases in the amount of capital or labor.Growth is being driven by services and domestic consumption. Consumption accounts for 64 percent of India's GDP, compared to 58 percent for Europe, 55 percent for Japan, and 42 percent for China. That consumption might be a virtue embarrasses many Indians, with their ascetic streak, but, as the economist Stephen Roach of Morgan Stanley puts it, "India's consumption-led approach to growth may be better balanced than the resource-mobilization model of China.”

Entrepreneurial-led growth vs FDI-led growth
Although both countries have traditionally produced entrepreneurs, the political campaigns initiated by the Chinese Communist Party, especially in the 50s and 60s, with its shunning of personal wealth creation and private enterprise, disrupted the flow of entrepreneurs. It is only since the introduction of paramount leader Deng Xiaoping’s economic reforms in the early 80s, that China has gradually developed a private sector.In China they have been reinventing a capitalist, entrepreneurial venture system over the past 20-25 years, whereas in India they have just gone sailing forward on the crest of the wave formed by the opportunities from business process outsourcing and the IT boom.”
According to the Global Entrepreneurship Monitor’s report for 2003 – the most recent statistics available for India – 12.5 per cent of the total Indian working population was involved in opportunity-based ventures, whereas in China the figure was about half that at 5.5 per cent.India displays every bit as much dynamism as China. The fact that India is increasingly building from the ground-up while China still primarily pursues a top-down approach, reflects contrasting political systems.
The FDI-driven manufacturing boom has its limitations. The technologies that are brought in by multi-nationals are often not the cutting-edge technology; for instance, no American company manufacturing satellites or aeroplanes has set up a manufacturing base in China. Possible dual-use technology is also not being brought in. FDI is far more than mere "capital". It is a uniquely potent bundle of capital, contacts and managerial and technological knowledge. But a comparison with long-time laggard India suggests that FDI is not the only path to prosperity. Indeed, India's home-grown entrepreneurs may give it a long-term advantage over a China hamstrung by inefficient banks and capital market.

Information Technology
Managers in China have little M&A experience, while several Indian companies are considering acquisition of Chinese firms to expand their operations.
The top ten Chinese IT services companies have only about 20 per cent share of the market compared with 45 per cent commanded by India's top ten. Furthermore, China has about 8,000 software-services providers, and almost three-quarters of them have fewer than 50 employees.
Chinese software services providers do little to develop their employees and very few use stock options, training programmes or other incentives to build talent

Impact of oil prices
Though Brazil has been one of the best performing economies of this year so far, a drop in the crude oil prices may severely impact their market going forward as so much marketing weighting is given to the companies in the oil industry. With crude prices dropping it wouldn’t be too surprising for other commodity prices to follow suit. So much market economic growth has been centered around the huge run up in commodity prices, as many of these countries are blessed with rich supplies of raw materials. Russia along with other natural resource based economies such as Australia and Canada could be in for a rude awakening if we get a continued drop off in commodity prices.
With India having almost signed the 123 agreement with the US, the energy scenario for the future seems more promising than ever. Nuclear energy production would lead to a reduction in the levels of dependence on the fuel based power in India.
China, the world's second biggest oil consumer, imported 11 per cent more crude oil at 90.53 million tons in the first half of 2008 than a year earlier, the customs administration said.
India’s crude oil imports in the first half of 2008 is approximately 60 million tons.

Very clearly, India has those potential advantages that could stimulate and sustain its growth of the economy over a long term. By 2050, India would be next superpower emerging out of the current developing economies group.