The United States just announced its support for the addition of India as a permanent member of the UN Security Council. Many have taken that as a move to counter the rise of Chinese influence on the world stage. The Chinese Premier Wen is due in New Delhi in December and is sure to provide India with an evolved view of China’s position on the matter.

It seems that both the U.S. and China will be courting India — and no surprise, as India is the next big power player after the rise of China.

Both the U.S. and China are trying to smooth over decades of differences with India. The U.S. for many years supported Pakistan as a natural counterbalance of the USSR’s support for India, and for many years China was not on good terms with either, after their rift with Moscow as well as border conflict with India.

In my opinion, India is likely to receive a permanent Security Council seat. The economic reforms that have been introduced in the last 20 years have put the country on a growth trajectory that someday will rival China and the U.S.

Why India is Unique in Asia

India is a low-income economy as GDP per capita is only $1,100, while China comes in at $4,300. One way to look at this is that China is almost four times more developed than India. However, the numbers above are based on official exchange rates, and a dollar goes a long way in India. So based on purchasing power parity — if a dollar bought the same amount of goods and services in every country in the world — India’s GDP per capita would be about $3,000, while China would come in at around $7,500.

Still, India has something that no other country in Asia has — a domestic demand driven economy that is not dependent on exports. This shields India from external shocks and causes Indian equities to trade at some of the most expensive valuations in the region.

As a result, over the past 10 years India’s Bombay Sensex benchmark Index (in red) has massively outperformed the Shanghai Composite (in blue) and Hong Kong’s Hang Seng (in green).

I believe that this should be viewed as an opportunity at present to buy Chinese equities — the huge move in the Shanghai Composite off the July lows validates this point. This does not mean you should sell India, as there has been a big rally in India too. It means that on a relative basis, Chinese equities offer a better value and still trade at deep valuation discounts to Indian equities.

Indian equities will probably trade at much more expensive valuations than Chinese equities for a while. This is because of the big difference in the objectives of economic growth in both countries. While China grows faster and has a much better developed infrastructure, sometimes too many projects are financed for the benefit of keeping employment at a high level, rather than to maximize effectiveness and profit. This is why China is a stock picker’s market — it’s easy to get burned with the wrong companies if you don’t have extensive experience with China. But on the flip side, if you understand the right companies to profit from the conditions on the ground, there are massive opportunities.

As for India, Indian privately-held companies tend to be very efficient and have little interference from the central government. Indian SOEs, however, generally have the same problems as most Chinese SOEs — have you ever seen a government that can run anything in an efficient manner?

One good thing that resulted from the expensiveness of Indian equities is that investors began to look for the relative values in the Indian market. The valuation discount that we observed in July between ICICI Bank (NYSE: IBN) and HDFC Bank (NYSE: HDB) has begun to close. This has resulted in IBN being a better performer than HDB so far in 2010.

But IBN trades at “only” 2.7 book value while HDB trades at 5.8 times book — valuation metrics unheard of in the developed world for a commercial bank. Still, this is how the market rewards banks that know how to produce rapid credit growth without sacrificing their lending standards, and as a result produce an exemplary record when it comes to non-performing loans!