Why US will always be the innovation capital of the world

Jan 29, 2013

In this issue:
» Indian arms of MNCs see a rise in market cap
» RBI cuts both CRR and repo rate
» Auto industry welcomes hike in diesel prices
» Investment banks cut down bonuses
» ...and more!

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The US may be quite down in the dumps right now, but it may have got its strategy right in terms of attracting the best talent across the world. Indeed, a group of senators in the US have unveiled a plan, which promises to grant a green card to anyone who completes a postgraduate degree in science, technology, engineering or mathematics (STEM) from an American university.

The US in the past several years has received considerable flak. Not only did the roots of the global financial crisis begin there, but the country is also now grappling with massive debt and recession. It has become increasingly hard for the country to display any meaningful recovery. Moreover, the government and the US Fed has only made things worse by resorting to reckless money printing.

Perhaps this is what induced some of these senators to fall back upon what the US does best i.e. innovation. In the past, the US became a force to reckon with largely due to its pioneering spirit and the entrepreneurial skills of its people. That is why the Senate framework stresses on the fact that the US must do a better job of attracting and keeping the world's best and brightest. What is more, the idea is to make sure that this talent stays back and contributes to the growth of the economy. This plan if implemented should find a lot of takers and Indians stand to benefit considerably. The quality of education in US universities and institutions is quite unmatched anywhere in the world. Thus, reforms of this kind in US' immigration laws will certainly see a lot of talent from the emerging countries including India making a beeline there.

What does this mean for India? The country's demographic dividend has been highlighted as a major growth driver several times. But again the quality of its workforce is what matters. Thus, the increasing possibility of Indian students flocking to the US in droves cannot be entirely ruled out. Especially since the standard of institutions in the country (barring the IITs and the IIMs) leaves a lot to be desired. And it does not seem likely that much headway will be made in this regard in the near future. All of this means that the US will still retain its status as the innovation capital of the world.

Do you think that US' plan to attract the best talent from the world will work to India's disadvantage? Share your comments or post them on our Facebook page / Google+ page

 Chart of the day
India has been a mixed bag for foreign investors. Especially those looking to stay invested in the country for a long time notably foreign direct investment (FDI). Some have found the endless bureaucratic hurdles, land acquisition and environment issues a big detriment to their plans in the country. But there have been many success stories as well. Indeed, as today's chart of the day shows that there are quite a few Indian arms of MNCs that have made significant strides in India. This is evident from the fact that the market cap of these companies now account for a significant chunk of the global market value of these MNCs. Some MNCs have realised the potential in the country and accordingly raised their stakes in their Indian arms. Others have not been so lucky.

*As at January 23, 2013
Data Source: The Economist

With inflation slowing, the Reserve Bank of India (RBI) finally bit the bullet and turned its focus towards ebbing growth in the Indian economy. The central bank gave India Inc a bounty of New Year's gifts even as it cut the country's GDP growth forecast. The RBI revised GDP growth target for FY13 downwards for the second time, from 6.5% initially, to 5.5% now. Thus, in order to revive sentiment, the central bank cut both the cash reserve ratio (CRR) and the repo rate by 0.25%.

These rates now stand at 4% and 7.75% respectively. The CRR is currently at its lowest level since December 1974 and the cut will release an additional Rs 180 bn of liquidity into the system. In order to spur loan book growth towards the end of the fiscal, banks may now start cutting lending rates. But, further monetary policy movement will depend on the government's stance. Recent government reforms especially the diesel price deregulation has staved off near term risks on the fiscal front. However, sustained fiscal consolidation is needed in order to create room for further monetary easing. Well, all eyes should now be on the Annual Budget due at the end of Feb.

It is not just RBI that is fire fighting inflation. Rest assured central bankers across the world have the problem clearly etched in their minds. The only problem is that some like the US Fed refuse to acknowledge it. However, we completely agree with an article in Financial Times that elaborates on why inflation cannot be ignored by any central banker. The author in fact predicts that inflation may become the biggest challenge for policy makers across the globe in 2013. However that may be in very different ways. It goes without saying that cheap liquidity from developed nations will find its way to Asia and other emerging economies. Central bankers here will therefore need to take pre-emptive action to curb inflation. In contrast, central banks in the West cannot bow to political pressure and keep printing money. By doing so they do are entering into the vicious cycle of inflation.

No deals equal no pay. This seems to be the motto of investment banks around the world. When things are hunky dory, they pay bonuses that help bankers buy Ferraris and Lamborghinis. But when the deal flows dry up they take to firing, deferring bonus payouts or even no bonuses. Given the dry spell that most of them had to face in 2012, most major investment banks cut back on their bonuses. Some slashed the amount by nearly 40%.

The few that did decide to payout a good sum were those who were involved in the high profile deals during the year. This included Goldman Sachs and Citibank. Given the depressed macroeconomic conditions, companies that have cash are reluctant to spend this on acquisitions. Those who do go ahead with it appear to be restricting the deal size. As deals get smaller or start disappearing altogether, investment banks have been finding it harder to increase revenues. Therefore it makes sense to cut back on costs if they wish to protect their margins.

Another side of this is why incentivize so highly in the first place? Would higher incentives not create a conflict of interest for the bankers? This is a question that has been raised repeatedly by the lawmakers. Unfortunately no major laws have been passed to discourage this practice as of now.

What do you think is the lesser of the two evils, a special tax on diesel powered passenger vehicles or an increase in diesel prices? If you think it is the latter, well, the entire auto industry seems to be in total agreement with you. As per reports, manufacturers of diesel run vehicles have welcomed the Government's decision to allow oil marketing companies to raise diesel prices. This could well be a negative for cars run on diesel. However, the overall auto demand in the country is unlikely to get affected. Simply because buyers could start moving back to petrol. And with most manufacturers in the country having both petrol as well as diesel capacities, they would continue to benefit from India's car growth.

A special tax on diesel run cars however would further increase the price gap between petrol and diesel cars. And this poses great risk to the huge investments that diesel manufacturers have made in diesel engine capacities. Not to forget the uncertainty it puts in mind of auto companies keen to set up capacities in the country.

In a bid to tame the bulging fiscal deficit, the finance ministry had set an ambitious PSU divestment target of Rs 300 bn for the fiscal. But the gloom that persisted through most part of the year stalled many such plans. In the year so far, the government has managed to garner merely Rs 96 bn. Now, finally when the market sentiment has improved a bit, it is trying to hasten the stake sale in six companies before the end of the current fiscal. A fresh round of divestments is set to start off next week with the offer for sale of Oil India Ltd (OIL). The other five companies whose stake sale is slated to be done within the next couple of months are National Thermal Power Corporation (NTPC), Nalco, Steel Authority of India Ltd (SAIL), Minerals and Metals Trading Corporation (MMTC) and in Rashtriya Chemicals and Fertilizers (RCF).

In the meanwhile, the Indian equity markets lost all of their morning gains and moved into the red. At the time of writing, the BSE-Sensex was trading lower by 77 points. Losses were largely seen in oil & gas and IT stocks. Stock markets in Asian economies such as China and Japan were trading higher by about 1% and 0.4% respectively.

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"Risk comes from not knowing what you're doing." - Warren Buffett

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    Equitymaster requests your view! Post a comment on "Why US will always be the innovation capital of the world". Click here!

    7 Responses to "Why US will always be the innovation capital of the world"


    Jan 31, 2013

    So far India gives very little incentive, motivation or support to development of talent. There is hardly any encouragement to brilliant persons to grow. Innovation is generally not encouraged. In such an environment it is better that Indians develop wherever opportunities exist. Thus at least may come back and make some difference here.
    We should therefore encourage such movement.


    Nilesh Thakkar

    Jan 30, 2013

    I don't think this will work to India's disadvantage. Braindrain is an old debate. But there is one interesting anecdote on this in which the example of football talent of Senegal is given. Senegal is a developing country, people love football, have good physical characteristics but professional opportunity and training were not there earlier. Then came the european football clubs which picked up talent and groomed them. And then, in some football tournament, Senegal got professionally trained football players to play for the country, which gave very good result. What would have been the achievement without european football clubs? As Ayn Rand says, there is a virtue in capitalism and capitalist selfishness. If 100 brilliant students are aspiring for USA, do you think all will get visas? Only 10 will get. Remaining 90 will be good engineers left for India. But if there are no prospects of prospering, may be, those 100 will not try that hard to qualify. I hope you will also agree that it is wrong to say that US's advantage is India's disadvantage as things are not that simple and there are many facets of the reality.


    Rahul Tandon

    Jan 30, 2013

    No, I do not think that such a step by the US will be disadvantageous for India in the long run primarily due to two reasons. Firstly, I feel that there is abundance of talent pool in India. Even if after excluding those who would decide to permanently shift themselves to US there would be plenty left in India to practice and contribute to the Indian domestic market in their respective field. Secondly, I feel that the trend of Indians rising to the top particularly in the business as well as in the political arena has already started in US and this can only strengthen with more Indians in the STEM area practicing in the US. This emergence of Indians within US is I believe will be beneficial to India, if not much but certainly can not be counter-productive for India.



    Jan 29, 2013

    I agree it is good for USA. However, India should focus on quality of education, as you indicated India can't depend only on IITs and IIMs. I believe Media is paying lesser attention on this subject which is very critical for India's long term growth story.

    India should evolve to provide quality education especially on higher studies. There should be open feedback system from students to indicate their opinion without fear from their college. Govt should encourage local research. Indians outside the country do support in India's progress indirectly and we need not worry about migration of talent.



    Jan 29, 2013

    The best talent, innovation etc.., etc.., are all nonsense and neither US nor the rest of the world is going to achieve anything out of the people. The honest truth is the world is moving in the direction of the great destruction and the days are not so far from now.

    Like (1)


    Jan 29, 2013

    Yes this seems to be a visionary step taken by US senators if got implemented and on the other side looks not very good effect for INDIA but actually we have no right to stop them here to get ruined due to dirty politics and so many other reasons in spite of this if we think how to make INDIA attractive for them is much fresh approach.

    Like (1)

    C K Vaidya

    Jan 29, 2013

    From a technical point of view, petrol and diesel should be priced in proportion to the calorific values of both these fuels. This will require diesel prices to be raised almost to the level of petrol. Auto manufacturers know that in view of the cascading impact such an increase will have on transport and prices of all commodities, the Govt is unlikely to take this drastic step. In other words, diesel will always be 'subsidised' and therefore diesel vehicles will continue to thrive. A special excise duty on diesel passenger cars, on the other hand will directly hit demand for diesel cars. Hence, diesel auto manufacturers are resisting special excise duty on diesel cars.

    Like (1)
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