India, no doubt, has corned the global market in the service sector. Think of it as the call center to the world. But China has established itself as the world’s factory floor, making everything from Barbie dolls to match sticks.

Yet while the growth in India has been impressive (its economy grew by 9.4% last year), it’s lackluster numbers on the manufacturing side have Indian entrepreneurs and policymaker disappointed and frustrated.

India’s service sector now accounts for more than half of the nation’s GDP. And that’s where its greatest growth has been, rising from 37% in 1990.

The only problem is that manufacturing has hit a wall, growing only by 2% of GDP from 1990 to 2005.  And many Indian entrepreneurs and policymakers fear India is losing out to China in a big way.

In China, manufacturing now accounts for 35% of GDP, according to the Boston Consulting Group. Compare that to 6% in India. Same goes for global trade. China clocks in at 7%. India a meager 1%.

"In our manufacturing potential, we are fast losing the race with China," J.J. Irani the director of Tata Sons said in an interview with BusinessWeek. Tata Sons is the parent company of the Indian conglomerate Tata Group, which is comprised of 98 companies that span across seven business sectors.

"China is more organized and faster than India," Irani went on to say, "The gap is widening."

Easing Up On Government Regulation May Help

Over the past two decades, India has been loosening its former dirigiste model, with strong government influence, in favor of a market-based economy. Direct taxes were reduced, government licensing of industrial activity was dissolved, and large companies were given more avenues for investment.

But some outmoded laws and restrictions still remain in effect, weighing heavily on manufacturing, curtailing Indian exports, and stifling the nation’s economic growth.

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Labor laws are notoriously strict in India, and the manufacturing sector has been bound in a cocoon of red tape. For example, in the manufacturing industry, a company that employs more than 100 people must notify the government of any plans to layoff or fire a single worker. However, that law does not apply to the service sector.

"We are overpoliticized and all of our problems have a political solution," Irani said.  "Economic problems need economic solutions. Religious problems need religious solutions. Social problems need social solutions. But everything here is an industrial solution, a political solution."

The Paris-based Organization for Economic Cooperation and Development agrees. Last week it released a report that stated: "The government’s target of reaching GDP growth of 10% in 2011 is achievable if reforms continue."

The report also concluded that: "In service sectors, where government regulation has been eased significantly or is less burdensome, output has grown rapidly, with exports of information technology-enabled services particularly strong."

The OECD is clear on its position that the country still has to loosen "restrictive" labor laws and the "inefficient" regulation of product markets if it wants to reach its goal. Additionally, policymakers must simplify the tax codes and encourage privatization.

Building From the Ground Up

Another key focus for India to gain competitiveness is infrastructure.

Expensive and unreliable electricity make blackouts all too common. Insufficient roadwork has left streets riddled with potholes and jammed with traffic.  Rolling blackouts force some factories to maintain costly back up generators.

India’s transport network is so inefficient it’s estimated that up to 40% of the country’s farm produce ends up rotting in fields or spoiling en route to customers. The price of food staples rises as a result, and that drives inflation.

BusinessWeek pointed out that the India of today bears a striking resemblance to the China of a decade ago.  Ten years ago China’s economy was getting ready to takeoff, but the infrastructure wasn’t there. So Beijing launched a massive modernization initiative, building 25,000 miles of expressway.  But India still has just 3,700 miles. That’s because only 4% of India’s GDP gets reinvested into infrastructure development. In China that number is more than double that, closer to 9%. 

Plans for improvement are ambitious, and India is taking the matter seriously. But putting the plans into action will be costly and time consuming.  New airports are currently under construction in Bangalore and Hyderabad. Nearly 3,750 miles of highways were built between 1999 and 2005 at a cost of about $7 billion.

And a little more than $12 billion went into the Golden Quadrilateral highway, which links India’s four biggest cities of Delhi, Mumbai, Chennai and Kolkata.

But right now, only 760 of the planned 4,500 miles of highway running north to south, and east to west, across the country, have been actually been completed. 

The heavy price tag that has come with progress has forced India to operate with a very high margin of debt. They country’s debt equates to 75% of its GDP (down from 82% in 2004), one of the worst ratios in the world. So, what’s an emerging country to do?

The Struggle to Attract Foreign Investment

If India wants to keep moving forward, it’s going to have to count on some big time contributions.  The Indian government estimates (or at least hopes) that public and private organizations will contribute between $330 billion and $500 billion to the nation’s development over the next five years.

That may very well be the case, but India is also going to need some help from abroad.  Inflows of foreign direct investment increased to 2% of India’s GDP from less than 0.1% in 1990. And the country only attracted $8 billion in foreign direct investment last year. China attracted $63 billion. 

Last year, Intel (NASDAQ:INTC) passed over India and chose Vietnam as the site of a new chip assembly plant. Intel made no secret of the fact that it looked to India as a home for the project first, and the snub baffled the country’s business community. Intel never offered a public explanation. Industry insiders have said it was the lack of reliable water and electricity that turned off the software giant.

The estimated cost of that plant was $605 million, and now Intel is ready to spend $1 billion on a semiconductor test and assembly plant in Vietnam.  This is just a fraction of the foreign investment that has retreated to other Asian interests in light of India’s shortcomings. 

Still, with many improvements underway and others on the docket, India isn’t out of the race.  Ford, Hyundai and Suzuki all export a significant number of cars from India. LG, Motorola, and Nokia all turn to India for to produce hardware for their respective phone services. And Honeywell, Siemens, and Schneider have all built factories for a variety of electronic products. Also, India has close to 60 manufacturing plants that adhere to the requirements of the U.S. Food and Drug Administration, the largest number outside of the United States.

Investing in India

India is losing the race with China but it has made a very strong impression in the service sector. If government reforms, infrastructure development, and foreign investment continue to increase then it may be able to make up some ground, but it’s going to be a tough road ahead literally and figuratively.

There aren’t many places to look if you’re interested in getting in on India’s developmental push.  A good place to start however would be Sterlite Industries India Ltd. (SLT). The company’s primary business is the production of copper in India. Sterlite’s copper cathodes and cast copper rods can be put to use in housing wires, electrical cables, and telecom cables. The company also mines bauxite and zinc ore, and produces aluminum conductors and other aluminum products.

A more diverse play might be the India Fund Inc. (IFN). The India Fund is a non-diversified, closed-end management investment company that invests in Indian equity securities.  At least 80% of the Fund’s total assets are invested in equity securities of Indian companies. Its portfolio includes common stocks, warrants and short-term investments.

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Housing prices will continue to decline and the downward spiral may not end until sometime in 2010, industry executives said this week.

Speaking at the Mortgage Banker’s Association’s annual convention Monday, executives from Fannie Mae and Freddie Mac, as well as the CEOs of two other major mortgage banks, said U.S. housing prices would continue to decline throughout next year, according to a report by The Associated Press. Indeed, several of America’s leading financial analysts presented a dour outlook for the U.S. housing market at the convention, and few of the executives had anything positive to add.

David Lowman chief executive of J.P. Morgan Chase & Co. (JPM), Paul Bibb CEO of National City Mortgage (NCC), and Thomas Lund and Patricia Cook of Fannie Mae (FNM) and Freddie Mac (FRE) held a round table discussion attended by most of the convention’s 4,000 participants. The consensus seemed to be that the recent spike in foreclosures and saturation of unsold homes would leave the housing market reeling for the next two years. 

 "It’s going to be a long time before we see [the housing market] bottom out and recover," said David Lowman, "There’s too much inventory in the marketplace." Lowman also said the price decline may not end until 2010.

Thomas Lund painted a slightly more upbeat picture, saying prices would flatten out in 2009 – before gradually rising. Lund added that he believed "this year we will see a 2% decline in national home prices, and we’re projecting about a 4% decline next year."

Patricia Cook, chief business officer at Freddie Mac, said that investors would need to see a slowing in the rate of foreclosures before regaining confidence in the mortgage-backed securities market. That revival isn’t expected to occur anytime soon, as many adjustable rate mortgages will be resetting over the next year. The Federal Deposit Insurance Corp.  (FDIC) estimates that 2.5 million mortgages made to borrowers with poor credit will reset at sharply higher rates by the end of 2008.

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Both Cook and Lund have lobbied Congress to infuse more cash into the market and provide lenders with the leeway to help homeowners refinance. Some lawmakers have joined them in urging regulators to let Fannie Mae and Freddie Mac (two government sponsored institutions) increase their holdings of mortgage debt by 10%.  The current limit stands at $735 billion.

According to Lund, higher investment caps, even temporary, would help restore investor confidence.

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The latest project to hit the headlines is a $5 billion offer from the Chinese government to fund roads, railways, hospitals and clinics in the African Congo. Elsewhere, China is already "the biggest investor in the Sudan," says the Seattle Times. In Freetown, the capital of Sierra Leone, office blocks, military headquarters and a refurbished stadium are all the work of planners from Beijing. In Uganda, Chinese money built the new State House.

While in Zambia, an "economic partnership zone" that will attract $800 million in investment was promised by the Chinese president on a recent state visit. Even Zimbabwe’s international pariah, Robert Mugabe, has declared: "We have turned East, where the sun rises, and given our backs to the West" – perhaps grateful for Chinese assistance in cultivating crops on land seized from white farmers.

Sino-African trade hit a new high of $55.5 billion last year, up 40% from the year before. In short, as Granta magazine put it, "the Chinese are everywhere."

What’s China’s Interest in Africa?

Beijing is interested in Africa because of oil and mineral rights. China ranks second to the United States in its consumption of oil, and needs huge quantities of other commodities to sustain its ongoing boom. So it’s no surprise that China president Hu Jintao is anxious to foster relations all over the resource-strewn African continent.

Oil-rich countries such as Angola – which accounts for around 14% of Chinese imports – plus Chad, Nigeria and Sudan have seen investment from Chinese companies for years. About 60% of Sudan’s oil goes to China.

Money has poured into a booming copper industry in Zambia and the Congo, while the Chinese are keen buyers of timber from such states as Cameroon, Mozambique and Liberia. As J. Stephen Morrison at the Centre for Strategic and International Studies sees it, "those places that are energy-rich and mineral-rich are awash in cash."

What Does Africa Get in Return?

The reason why China is "winning friends in Africa" is simple, says economist Philip Alves. Many African countries that have struggled to access funds from the International Monetary Fund (IMF) and the World Bank find the Chinese easier to deal with. For the poorest continent on the planet, offers from Beijing – such as those made at last November’s China-Africa Cooperation Forum for billions of dollars worth of preferential loans, buyer’s credits and the training of 15,000 African professionals – are very attractive.

All the more so when Chinese money rarely comes with any of the political conditions attached to Western funds. As Sudan’s energy minister noted recently: "With the Chinese, we don’t feel any interference in our traditions or politics or beliefs."

Meanwhile, a flood of cheap Chinese goods from motorcycles to T-shirts to kitchen utensils leads one ambassador to comment, "The Chinese are doing more than the G8 to make poverty history."

There are Risks

Some argue that closer economic and trade ties will lead to "neo-colonialism", where African resources are plundered by Beijing and sent back in the form of Chinese goods. They point out that an influx of affordable Chinese goods doesn’t raise the wealth of most impoverished Africans and actually makes life harder for local firms. As a Zimbabwean newspaper owner put it, "If the British were our masters yesterday, the Chinese have come and taken their place."

Another concern is that China’s links to – and implicit support for – controversial regimes will undermine efforts to introduce democracy and improve human rights in countries such as Angola, Nigeria and Sudan. For example, data on arms sales produced by the Council on Foreign Relations are highly troublesome. Over 10% of Africa’s weapons purchases from 1996 to 2003 were from China, with big deals struck with states such as Sudan, Ethiopia and Zimbabwe.

So is this just Africa being exploited yet again?

Not necessarily. As Lindsay Hilsum says in Granta, poverty remains Africa’s greatest and most urgent problem. Western countries may rail against Beijing’s business practices, but the fact is that Africa needs trade and – in contrast to Western capital – China’s cash arrives quickly and "with no colonial hangover and no complex relationship of resentment."

Today, many African economies are enjoying their fastest growth rates in 30 years, largely on the back of Chinese demand for raw materials. Chinese investments in African infrastructure have very deep roots, including some that reach back to large projects in the 1960s and 1970s.

And Granta’s Hilsum says that many Africans look at China and see success rather than threat. World Bank figures suggest that China has lifted 400 million of its own people out of poverty in the last 20 years. Could Beijing do the same for them, Africans wonder? Unless Western institutions up their game in the region (one African diplomat observed, "If a G8 country had wanted to rebuild our stadium, we’d still be holding meetings"), China could provide opportunities for Africa that Europe and the United States have often failed to deliver.

The doubling of wheat’s price in the past year – combined with recent forecasts for price declines – have turned wheat’s wholesome image into a volatile one. And depending on where you live, you’ll hear a different story.

In Australia, the world’s second-largest wheat exporter, droughts have cramped the yearly harvest so much that its Bureau of Agriculture and Resource Economics said the country would produce 31% less wheat (15.5 million tons) than it estimated back in June.

"Some of the estimates I’ve seen suggest if it doesn’t rain by harvest time the crop could be as low as 12 million tons," Justin Smirk, a senior economist at Westpac Banking Corp., told Bloomberg News. "We have got a serious problem unfolding in the wheat regions in New South Wales."

Drought also took a chunk from the harvests of Canada (the world’s largest wheat producer) and also the Ukraine. In Syria, the Middle East’s lone grain exporter, drought swiped 4 million tons from this year’s harvest. Meanwhile, its neighboring importers (and Japan) want to import more than 1.1 million tons of wheat.

In the United States, the U.S. Department of Agriculture is expected to estimate our biggest wheat harvest in three years, even though excessive rain damaged a portion of the harvest. Wheat’s $7.7 billion annual value ranks it fourth among crops produced in the United States – behind corn, soybeans and hay. And half of the wheat grown in the U.S. market is exported, according to the USDA.

But taken together, global inventories of wheat are at a 26-year low. And that’s why wheat prices peaked Wednesday at $9.1725 a bushel.

"We can not rule out $10 for wheat," Takaki Shigemoto, an analyst at Okachi & Co. in Tokyo who has been researching grain markets for 25 years, told Bloomberg. "Exporters are reducing the amount to curb domestic food prices, while importers are trying to secure as much grain as possible."

But What Goes Up…

So why are analysts also forecasting a wheat-price plunge when the global supply is being squeezed by harvest problems?

There’s one basic truism about financial markets of all types that investors – and even actual market participants, such as farmers in the agricultural commodities market – can never seem to remember: The financial markets are forward-looking. That means that prices today are in part a reflection of what the future holds, both in the near-term and in the long-term.

That’s why wheat prices are projected to soar. You see, instead of just watching wheat prices soar, farmers are planting more for next year’s harvest. The projected oversupply could easily cause wheat prices to tumble 30% in the next year, analysts say.

A drop in wheat prices will relieve at least some angst at the cash register. Like corn, wheat is a ubiquitous staple of the American diet – it’s a key ingredient in flour, bread, pizza dough, pasta, cereal, cookies, crackers, and more. With the dollar getting weaker and the price of oil soaring into the stratosphere, everyday consumers can celebrate a slip in price for wheat-related goods.

The same goes for wheat investors. Granted, prices will go down when supply is replenished, but wheat still remains an excellent long-term investment. If anything, wheat’s price drop will be a great place to get in for investors who missed wheat’s surge earlier this year.

Here’s the easiest way to break it down. Wheat will always be in demand because people will always need to eat. As long as the world’s population grows, investors of wheat – like corn, milk and all other agricultural commodities – will benefit.

For proof, consider China. The effects of wheat’s soaring costs bleed into the cost for feeding cattle, poultry and pork. And that’s helped send food prices soaring: Pork, for instance, is up 86% from a year ago.

Hundreds of millions of people in China are enjoying middle-class daily luxuries – such as dairy and meat – for the first time. And millions more will follow, not just in China, but also in India and Latin America. Since grain is a big part of livestock feed, this adds an enormous and previously unseen demand for wheat.

The higher costs associated with wheat – and the higher price for wheat in the marketplace – probably isn’t just a temporary blip. Over the long haul, the price of wheat – like other agricultural commodities – is probably going to go up. So perhaps investors can offset the pain of higher food costs by profiting from the agricultural markets themselves.

Separating the Wheat From the Chaff

There are few "pure" wheat plays in the marketplace. And those heavily affected by wheat’s price, such as Saskatchewan Wheat Pool (SWP) and General Mills, Inc. (GIS), are stuck between passing higher costs onto customers, and absorbing the costs themselves.

Neither are positive scenarios for investors. Instead, a better play is the source of wheat – farms.

Investors in Europe can tap wheat directly via ETF Securities Limited. Its wheat ETF is 100% allocated to the wheat market and is traded on the London Stock Exchange.

In the United States, the best investments opportunities are more diversified across the agricultural spectrum.

Deutsche Bank’s PowerShares Agriculture Fund (DBA) is intended to reflect the performance of four commodities in the agriculture sector – soybeans (31.13%), wheat (28.87%), corn (23.43%) and sugar (16.58%). These include some of the key commodity plays that well-known investor Jim Rogers advocates. [To see what famed author and investor Jim Rogers has to say about wheat - and other agricultural commodities - please click here.]

Another is Van Eck’s recently launched Market Vectors Agribusiness ETF (MOO). Like the PowerShares Fund, this reflects the agriculture industry but in a different way. Instead, the ETF’s holdings reflect returns seen from agriculture chemicals (34%), agriproduct operations (33.5%), agriculture equipment (24.3%), livestock operations (5.6%) and ethanol/biodiesel (2.3%).

Besides, with a ticker symbol like that, how can you go wrong?

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