Why India might overtake China.........

It has only been a few years since Asia bulls have been touting the arrival of the Chinese Century, citing that nation's enormous potential.

Now, get ready for predictions of the India Century.

That, in fact, was the title of a recent white paper by the Chicago-based consultancy Keystone-India, founded by a group of top economists from Ernst & Young who believe that India is on track to surpass China in growth. "We believe this is India's moment," declares Keystone Chief Economist William T Wilson.

China has a two decade-long track record of 9.5% average annual growth, exports 10 times as much as India, and dwarfs India as a magnet for foreign investment.

By contrast, India has achieved an annual growth rate of 7% or higher only seven times in the past two decades. And largely because of its unruly politics and stifling bureaucracy, it wasn't long ago that economists bemoaned the "Hindu growth rate," implying the nation is simply culturally incapable of achieving high growth.

Even under Keystone's projections, India wouldn't match China's current hypergrowth rates for at least another 15 years. And even by 2050, China's economy would be bigger measured in US dollars.

But longer term, Keystone contends India will be in a stronger position. It projects that China's average annual growth will peak at 8.8 per cent over the next five years, and then gradually trend downward to under 7 per cent in the 2020s and around 4% by the 2040s.

India's annual growth is projected to rise to around 7.3 per cent by 2010 and stay over 7 per cent until the mid-2030s, and still be in the 6% range until 2050.

What's more, Wilson contends that Keystone's forecasts are conservative.Why is Keystone so bullish? Some of the key reasons:

Demographics

The biggest reason India has more long-term growth potential is simply that its population is younger and is growing more quickly than China's. Currently, China has 300 million more people than India.

But because of its very low birth rate, largely due to the one-child policy, China's population is expected to peak at around 1.45 billion by 2030.

India's population is expected to increase by 350 million by 2030, more new people than the US, Western Europe, and China combined. India will have 200 million more people than China by midcentury.

What's more, China's population is aging rapidly. As a result, the number of working-age Chinese is projected to peak in 2020 and start declining steadily thereafter, while India's workforce will keep growing for at least four more decades.

However, India's fertility rate also is declining, meaning future families will have fewer children to support and more to spend on consumption.

Development experts call this combination of a growing workforce and declining fertility a 'demographic dividend,' which helped power explosive economic growth in East Asia's Tiger economies from the 1960s through the early 1990s.

Capital Efficiency

The big driver of China's economic growth has been massive investment, equal to 40% to 45% of gross domestic product a year, an extraordinarily high rate on world standards�and twice the percentage of India's.

In 2004, investment in China was equal to half of its $1.5 trillion in GDP. In that context, China's 9.5% growth rate that year shouldn't be too surprising.

"It is staggering how much investment was needed to power Chinese growth in recent years," Wilson notes. "Any nation investing half of GDP in fixed-capital income looks a lot like pre-crisis Asia."

India, however, gets much more bang for the rupee. It has achieved 6% average growth with an investment rate half that of China's, around 22% to 23% a year.