HSBC’s Neumann argues that higher debt levels and a greater reliance on investment make China vulnerable to global financial shocks. “The risk of a hard landing is greater in China given these structural challenges,” he said.
“India, by contrast, suffers from insufficient investment and higher inflation, both of which can be more easily corrected by policy adjustments," said Neumann.
Inflation in India is above 7 percent, while foreign inflows are a trickle compared to China’s over $100 billion in foreign direct investments annually.
But a “much younger population and thus far lower wage pressures will eventually allow Indian firms to gain market share in global exports, pushing the country's growth rate up while China's will inevitably decelerate,” believes Neumann. (More:Why Are Indians Suddenly Buying Diamonds?)
For Daruwala, India is in a better position than China to weather the slowdown in global demand. “With consumption in the U.S. and Europe slowing down, China's production, output and jobs may be the worst hit,” he said.
Prior-Wandesforde points towards the performance of the two countries' stock markets as an indicator of investor confidence. “India’s outperformance versus China is significant.”
Both countries saw a drop of more than 20 percent in their stock markets last year, while India’s has recovered this year to post a gain of nearly 22 percent year to date, China’s is down about 4 percent.
Despite this rapid change of mood toward India, which until a few months ago was threatened with a credit downgrade to junk status, huge challenges still remain and experts warn against getting carried away.
“Earlier the mood was worse than reality, and now the mood is better than reality,” said Rajeev Malik, senior economist at brokerage CLSA Singapore. He added that “it’s a gross exaggeration to label the reforms as ‘big bang.’ They are overdue moves that are welcome and constitute a good start. But the government needs to do a lot more.”
In a politically risky move, India raised the price of heavily subsidized diesel by 14 percent for the first time in 15 months on Sept. 13 in an effort to curb the fiscal deficit at 5.8 percent of GDP. While this will limit fiscal overshoot, it will have a minimal effect on its subsidy bill, said experts.
“India needs to cut subsidies further … the reforms so far are just the beginning of a long and painful process. It is not the magic key to 9 percent growth,” said Neumann.
Economic growth in India has slowed to around 5.5 percent this year, a far cry from the near 9 percent growth rate a couple years back, and even the most optimistic don’t see India returning to those growth rates in the next few years.
But the long-term story stays intact as long as India can convince investors that they are not going to renege on decisions and continue with further reforms, said experts.
This may not be easy given the fact that the government faces an election in 2014, and politics could trump economics. “Expectations have risen. Hopefully, the government will come through with some constructive action … fingers and toes crossed,” said Malik.