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India has the potential to be the next great bull market of the 21st century – an opportunity of being a better investment than even China!

Like China, India was stuck with a failed economic system for over 50 years. It was a bureaucratic, socialistic state that led to weak growth, and stymied entrepreneurship and initiative. Famines, lack of investment, and poverty were the result.

But In the early 1990′s, the country changed course and started to open up its economy to the world. Personal marginal tax rates have fallen from 50% to less than 30%. Tariffs and import quotas were slashed, exports are growing at a 20% annual rate, with America being its largest market. Only 10% of its economy is dependent on international trade, insulating it somewhat from external shocks. The banking system is much improved, and non-performing loans have dropped to less than 4% of total bank loans. It has fiscal crisis to accumulating $135 billion in foreign exchange reserves.

Here are six reasons that investors should consider tilting some of their long-term capital towards India and not China.

Unlike China, India is a functioning democracy with respect for property rights and the rule of law. China’s authoritarian state may have the advantage at making quicker decisions and pushing through economic reforms but without democratic political reform it will eventually hit a speed bump the size of the Great China Wall. India’s multi-party parliamentary system with its obstructionist bureaucracy is far from ideal but at least the daily speed bumps on the road to market reform can be overcome.

India is a natural ally of the U.S. as it emerges on the global stage and plays classic balance of power politics. America’s relationship with China will at best be wary and tense. The fact that many Indian citizens speak English is also a significant advantage both commercially and politically.

China’s state-owned companies have staying power but government ownership will limit their growth and potential. Foreign governments will be suspicious of their intentions and likely consider them as an extension of the Chinese government. State ownership will also lead to inefficiencies and an inability to hold onto top management talent.

India’s capital markets are better than China’s. India’s stock market was established in 1870 and has 6,000 publicly-traded companies and a more modern financial and banking system that allocates capital fairly well. Only 10% of bank credit in China goes to private companies. India has 100 companies with a market cap over $1 billion.

India is a very youthful nation with 50% of its population under 25 years of age. This leads to less strain on its national budget and the hope that the younger generation will drag the bureaucracy and politicians to swifter implementation of market reforms. China’s one-child policy has backfired leading to an aging population which will lead to manpower shortages and tremendous pressure on its national budget. 20% of Shanghai residents are over 60 years old and by 2020, one-third of Shanghai’s population of 13.5 million will be over 60.

India has a more balanced and sustainable economy with 64% of its GDP attributable to consumer spending and 50% of its GDP from service sector. China’s economy is more dependent on foreign investment, exports and resources. India’s 250 million living in poverty is a tragedy but it’s middle class has quadrupled during the past two decades to reach 250 million as well.

For sure India has its challenges: big infrastructure needs, frustrating red tape and a tendency for the government to hang on to large state-owned enterprises to mention a few. It has recently suspended its privatization program, has high levels of public debt, very poor basic services such as elementary education, water and health, rigid labor laws, and still lacks the consensus that exists in China for welcoming foreign investment and placing a high priority on economic growth. India’s infrastructure such as roads, power and ports is also in desperate need for investment. This is one area that China is way ahead of India. The other is China’s ability to attract roughly ten times as much foreign direct investment.

India’s economy is doing well but is still below its potential. Just think if India embraced foreign investment, privatization, had the political will to improve the lives of workers in agriculture by consolidating farms and using more technology to vastly improve productivity. If it can provide its citizens with quality basic education and other services and put in place adequate power and other infrastructure, it can create 100 million new jobs in industry and manufacturing.

Still, compared to China, India does not get much attention except for the outsourcing issue and is – for now – largely under the radar screen of even sophisticated investors. After a strong start this year, India’s 30 company Bombay Sensitive Index (Sensex) index was beaten down more than 20% but has recovered to be flat for the year.

The challenge with investing in India right now is valuations of the leading companies and the limited investment options. Valuations may be getting a bit ahead of themselves with SENSEX companies trading at around 17-18 times next year’s earning projections versus 13 times for emerging markets as a whole.

The Morgan Stanley India Fund (IIF) is a closed-end fund that invests in India’s blue chips trading at $42, quite a bit off its 52-week high of $57. It is a bit pricey right now and trades at a 17 % premium to net asset value so caution is recommended until this premium comes down to the historical average in the low single digits. I would make only a modest allocation at this point. There are also some Indian ADRs trading on U.S. exchanges and these are also expensive and trade at a price premium over the India market price. My favorites are Dr. Reddy’s Laboratories (RDY), HDFC Bank (HDB) and Tata Motors (TTM).

Be patient – there no doubt will be great investment opportunities as well as new investment vehicles to take advantage of this great secular bull market.
India presents investors with the opportunity of a lifetime and its democratic government, stronger financial system, market-based interest rates and history of respecting property and intellectual rights may make it a better long-term play than China.

The last Budget of Gorden Brown was a bold political move that presented him in a good light right before his Prime Minister bid. He abolished the 10p rate of tax, and lowered the 22p tax bracket to 20p – a move to show Labour cuts taxes.

It wasn’t until he was elected, that it came to light that the tac changes had meant the lowest paid workers of the country were now paying more tax.

There was outcry, and under intense political pressure, tax rebates were offered which come into play on September 2008. These aren’t cheques in the post like the American system, since such a move could encourage more debt. Those people who know money is coming on average spend more than they are going to receive in debt before it comes.

The UK rebate was paid in income tax changes, so a worker would only see an increase in a pay-packet, or next time they audit for self employed people.

So what is all this talk about UK tax rebates, and does it affect you?

* 5 million low paid workers were losing out due to the abolition of the 10p tax rebate – this is roughly classed as all those who earn less than £17,000 a year.
* The rebate will cost around £2.7 billion to the UK coffers.
* The tax rebate will be given via the pay-slip PAYE, or next year if you’re self employed when you declare your taxes.
* The rebate was done by changing how much taxable income you are tax free on – increasing from £600 to £6035.
* There are still losers – those earning £8-10,000 were to lose £200 a year from the new tax laws – the rebate should give back £120 so they will still be losing £80 compared to pre-budget.
* People earning from circa £17,000 to £40,835 gain from the rebate, as they were better off before anyway under the 10p tax rate abolition and now get the rebate on top.

The Government are now heavily publicising this move, to try and gain them favours with the public before a big downturn in the economy looms. Darling the Chancellor even went on record, in an unprecedented step, saying:

“the economic downturn would be “profound and long-lasting”,

“…has insisted it is his duty to be straight with the public, after telling a newspaper the UK faces its worst economic crisis in 60 years.”

“…that voters were “pissed off” with Labour’s handling of the economy, a key issue at the next election, and said it was “absolutely imperative” that ministers communicated their intentions better.”

This is the MP whose job it is to known everything about the economy of the UK. If he says we’re in trouble, we’re in trouble.

The words given to the MPs to say in TV interviews are like mantra’s – to every question asked of Darling after he had been “briefed” his answer included:

* I’m being honest
* Every other country in the World
* Unique Circumstances
* Credit Crunch
* Rising Oil and Food Prices
* We helped Northern Rock
* Tax Rebate next month
* Helping People getting back into work
* Fundamental of Economy Sound

“Who’s going to win Eurovision this year?” “Honestly, every other country in the world has rising oil and food prices, I remember when we helped northern rock I was going to give a tax rebate next month…blah blah blah…I think they should bring back Cliff Richard.”

I don’t have a TV so I don’t need to listen to repetitious spin a lot. Lets break it down a bit:

* I’m being honest – Why do I get jittery when a politician starts with that?

* Every other country in the world… – Asia seems to be unaffected thus far

* Credit Crunch – such a buzzword for people at the moment. Basically free credit to everyone will eventually cause problems, you can’t keep borrowing forever.

* Rising Fuel and Oil Prices – Why did we invade Iraq – wasn’t it for WMD or for “$20 a barrel oil”? Because both failed.
* We Helped Northern Rock – Nationalising a bank under intense pressure after failing to find it a buyer, placing £1.3 billion more in national debt.
* Tax Rebate next month – What tax rebate? The one where companies can claim back VAT they shouldn’t of paid in the first place because they overpaid?

Or the rebate to make up for the blunder of not noticing abolition of the 10p tax rate would put the lower paid workers out of pocket?

In the United States, federal reserve banks exist to regulate the banking industry. They are government agencies tasked to provide financial services for the government and for other banks. They also help implement the country’s monetary policies and control the money supply in the market to stabilize the economy.

Federal reserve banks perform a variety of services for other banks such as providing emergency loans to banks that are short of cash and assisting those that are facing financial crisis. They help keep the economy afloat and therefore, they play a very important role in the country’s growth and development.

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