India trumps China in FDI returns

China is a more attractive destination for foreign investors, but return on assets in India has been much higher, Germany-based Deutsche Bank said in a commentary on the world's two largest emerging economies, which are changing the way global businesses are conducted.

"Although India started economic reforms only a decade later than China, it is far more advanced in its institutional infrastructure and corporate governance. This is reflected in contrasting outcomes. Foreign direct investment is considerably lower than in China, but returns on investment are better on average," according to an analysis titled "China & India - A visual essay" by Deutche Bank.

India has better corporate governance standards and its companies are more commercially-driven. Hence, despite China's superior economic growth and macro-economic stability, India's rate of return on assets has been much higher and the stock market performance much better. Even the amount of non-performing loans in the banking sector is much lower compared to China.

China's GDP per capital is now 2.2 times higher than India, in dollar purchasing power parity terms. Until the early 1990s, GDP per capital in China and India was at comparable levels.

Deutsche said the two economies are poised to change the global economic landscape as they two are increasingly integrated with the world. It said the chinese economy is much more integrated with the world economy through international trade and investment, which helps to explain its stronger rate of GDP growth during most of the past three decades.

For its economic development, China has relied on industry and India on services. China's ratios of domestic savings and investment to GDP are roughly double those of India's.

Both the economies currently enjoy strong external positions, with ample foreign exchange reserves. Higher oil prices are not likely to have a significant adverse impact on external liquidity.

China and India have low external debt as a percentage of GDP, and the ratio of short-term external debt to foreign reserves is low. Deutsche, however, noted that despite declining fiscal deficits, the level of public sector debt is a cause for concern, especially in India.

Interest payments as a percentage of general government revenue are very high in India, making the prospect of fiscal consolidation more remote.

Excess domestic liquidity presents a bigger challenge to China than India. Money supply in China is heading towards 200 per cent of GDP with domestic credit almost 170 per cent of GDP.

Social indicators reflect generally improving living conditions for the average Chinese. China also enjoys superior physical infrastructure, although in India the availability of skilled workers is much higher.