Whenever I see the many articles discussing the risks of investing in China, like this list at Interactive Investor Blog, my immediate reaction is, why not invest in India.

The key reasons I think India has a bright future are its large service sector and its effective institutions. The obvious reaction is “What? Call centres and bureaucracy?”.

Firstly, India has strong state institutions. A functioning democracy and an independent (if slow to act and arrogant) judiciary. India also has strong financial institutions, and better regulation. This article argues that India can overtake China because of better institutions, with more detail, particularly on the better financing of domestic firms.

An important point about the financing, is that although China gets far more foreign investment, India directs investment more efficiently. In particular, smaller companies have a better chance of raising money.

At some point China’s economic growth will bring about political change. India has existing institutions that can adapt. In the long run, India is more stable, precisely because of the short run instability of allowing voters to kick out a government they no longer want.

India’s service sector is far bigger than China’s, and is growing faster. Graphs of this and other useful numbers can be found in this visual comparision by Deutsche Bank Research.

There is a lot more on the India vs China comparison in this post on the World Bank’s Private Sector Development blog.

Returning to the service sector, I suspect many people’s reaction will be that it is all about low cost BPO. Firstly, BPO is growing, so it is not a bad thing to be in. Secondly, India’s service sector exports are not just BPO, but also R & D, investment research and almost anything that is not location dependent.