Robotics and Automation: Opportunity in Crisis

In this issue:

» India's unemployment level to worsen in 2017 and 2018

» Have all the banned notes made it back into the system?

» Market roundup

» ...and more!

Automation and robotics is one of the hottest - and most hotly debated - megatrends at the moment. And for valid reasons. These new technological leaps have grave implications for the way we live, communicate, work, and make money.

Last Friday, my mentor Rahul Shah wrote a brilliant piece on why automation shouldn't scare you to death...

• Automation has been with us for ages. And it hasn't threatened mankind yet. Sure, some jobs have been lost along the way. But overall, automation has made us more productive and raised our standard of living.

Indeed, if history is any indication, the current wave of robotics and automation is not going to result in a jobless dystopia. In the longer run, we will find ways and means to deal with the radical shifts in technology. Meanwhile, the adjustment will be challenging.

In 1927, US Secretary of Labor James J Davis gave a speech that would resonate today...

• Every day sees the perfection of some new mechanical miracle that enables one man to do better and more quickly what many men used to do. In the past six years especially, our progress in the lavish use of power and in harnessing that power to high-speed productive machinery has been tremendous. Nothing like it has ever been seen on earth. But what is all this machinery doing for us? What is it doing to us? I think the time is ripe for us to pause and inquire.
  
  Understand me, I am not an alarmist. If you take the long view, there is nothing in sight to give us grave concern. I am no more concerned over the men once needed to blow bottles than I am over the seamstresses that we once were afraid would starve when the sewing machine came in. We know that thousands more seamstresses than before earn a living that would be impossible without the sewing machine. In the end, every device that lightens human toil and increases production is a boon to humanity. It is only the period of adjustment, when machines turn workers out of their old jobs into new ones, that we must learn to handle them so as to reduce distress to the minimum.

If we were to translate this to our current times, India's demographic crisis would be the adjustment period when disruptive technology takes away jobs, stagnates wages, and intensifies the rich-poor divide. It is this adjustment period that could cause major socio-political upheavals as a sizeable portion of the workforce finds itself unable to cope.

Now, if you take a very long-term view, people adapt...new opportunities arise...and life goes on.

But before things even out and a new normal is established, we are faced with a brewing storm. And let's not pretend this massive storm will pass us by without leaving real devastation in its wake.

The possibility of artificial intelligence eating up jobs and incomes is not an abstract threat. It's real, and it's approaching fast.

Now, I am not going to dwell on the how, what, why, and when of this approaching storm...

Our mission at Equitymaster is not to predict storms. We believe in building arks that could help you survive...even thrive...in stormy waters.

As Rahul Shah put it:

• Artificial intelligence could be a great opportunity for humans to collaborate.

That's exactly what our research team is doing right now. And these are the critical questions we are asking...

• How is the megatrend in robotics and automation going to impact the business and economic landscape?
• Which companies are riding this megatrend to improve the quality of their goods and services, to reduce costs and boost productivity and profitability?
• How could investors benefit from this megatrend in robotics and automation?

In fact, my colleague Richa Agarwal - who heads our small-cap stock recommendation service - Hidden Treasure, has already discovered some brilliant businesses that are riding this megatrend.

We're looking for opportunities in every crisis. Are you ready to profitably ride this megatrend?

02:30 Chart of the day

Let's take a look at some numbers on unemployment in India...and what's the likely trend over the next two years.

As per the latest United Nations labour report, India's unemployment level is set to rise through 2017 and 2018. In other words, job creation is expected to remain stagnant.

Today's chart presents the projected rise in unemployment over the next two years.

India's Unemployment Level to Worsen in 2017 and 2018

The report pegs the unemployment rate at 3.4% in 2017-18, similar to current levels. But there's high probability these numbers are understated. The unemployment rate reported by the BSE website puts the current unemployment rate at over 6%.

India has been struggling with jobless economic growth since over a decade. According to the latest Economic Survey, annual employment growth in India was only 0.5% during the period 2004-12, while labour force growth was 2.9%. This is in sharp contrast to India's gross domestic product (GDP) which has been growing at over 7%, on average, for quite a few years now.

Given this history, we're not sure if the projected unemployment rates are realistic and reflect the full impact of the demonetisation drive. While Finance Minister Arun Jaitley has rebuffed worries about job losses and losses to businesses on account of demonetisation, we believe there are solid reasons to think otherwise.

The note ban has hit India's informal economy very hard. And India's informal economy is huge...it is the largest employer. As per Bloomberg, the actual share of the informal sector in non-agricultural employment in India is 83.6%. Just to give you a sense, this number for China stands at just 32.6%.

Let us remind you that our prime minister had promised to create 100 million jobs by 2022. The Modi government is already halfway through its term and there are no signs that job creation is picking up.

The coming months will be crucial to evaluate the full impact of the demonetisation drive on the Indian economy, employment, and corporate earnings. We will keep monitoring the ground realities and keep you updated.

Last week, we clearly said that the demonetisation drive was not a real fight against black money. That came as to shock to some readers who sincerely believed the government's version. Some questioned the veracity of the report that claimed that 97% of the Rs 500 and Rs 1,000 notes in circulation until 8 November had returned to the banks in a big blow to Mr Modi's fight against black money.

Now, if an article in The Economic Times is to be believed, the RBI's own weekly figures on currency in circulation validate the earlier claims. As per article, only Rs 540 billion of the notes banned on 8 November 2016 failed to make it back.

But wait...even this figure assumes that no new notes were printed after 19 December 2016. This is impossible. So it could well be that all the banned notes have made it to the banks. Or worse, more banned notes may have returned to banks than were said to be in circulation.

If these concerns are not legitimate, why is the RBI not publishing the final numbers yet? Why is the government silent on critical matters relating to demonetisation? This prolonged silence makes the matter even more eerie.

In the meanwhile, the Indian indices traded with marginal gains during most part of the trading session. While IT and energy sector stocks are trading weak, realty and consumer durables stocks were trading on a positive note. The BSE Sensex is trading higher by 42 points, while the NSE Nifty is trading marginally higher by 8 points. The BSE Mid Cap and BSE Small Cap indices are trading higher by 0.2% and 0.5% respectively.

04:50 Investing mantra

Just the discipline of having to put your thoughts in order with somebody else is a very useful thing. - Charlie Munger