Indians must do this to keep their jobs

In this issue:
» Should one bet on commodity prices for the near term?
» No frills account subsidy to add to fiscal woes
» A telecom major on the brink of bankruptcy
» Poverty levels rise due to food prices
» ...and more!

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00:00

It would not be uncommon to find entry level jobs fetching double the salary than they did 4 years ago. The rise in compensation levels in India is amply evident in the uptick in per capita income. The wages for unskilled jobs have also seen a respectable growth. But this gets dwarfed when compared with the rise in neighbouring China. Although on a very low base, Chinese wages have witnessed a double digit jump each year in the past 4 years! One can conclude that the difference is due to large employment of unskilled labour in manufacturing bases in China. The service oriented manpower in India is relatively more skilled and better paid.

No doubt the rises in income levels have been a reflection of overall economic prosperity. Also they have accompanied commensurate rise in labour productivity. But being 2 to 3 times more expensive than their counterparts in Indonesia and Vietnam may soon cost Indian and Chinese blue collared workers their jobs. Now the question here is not whether emerging economies like India should remain cheap manpower destinations. But whether being low cost is the best way to remain employed.

Be it export of software, textiles and gems and jewelry or BPO services to MNCs, the low cost model is unlikely to sustain we believe. It is the value addition in products and services that will help Indians retain employment. Rise in compensations may make Indians more expensive than some labour classes in other parts of the world. But ensuring that most of the labour is skilled and up-skilling the rest is the answer to our woes. Unfortunately the government policies and investments in this direction leave a lot to be desired. Probably it is the private sector that needs to have this in the long term goals to ensure better employment scenario for India.

Do you think private sector investments in skill building can improve the employment scenario for India? Let us know your views on this or post them on our Facebook page.

01:10		Chart of the day

Prices of precious metals including gold and silver have been venturing into unchartered territories for a while now. Demand backed by inflation and currency devaluation concerns are the key to this spurt in prices. But more importantly, it is the large scale investor participation that that has spurred the sale of the precious metals. Gold ETFs for example have been very popular in India in the past year. As today's chart shows the world's largest Silver ETF ranks 5th in term of market capitalization of ETFs. But given that this product is soon to be introduced in India and other countries, we believe that the white metal too may move up the ranks.

Data source: RBI
Note: Market cap as on 15th February 2011

01:50

Sticking with commodities, most of us would have come face to face with the famous five forces framework developed by Michael Porter of Harvard Business School. One of the forces mentioned in there was called the bargaining power of buyers. When it comes to commodities, we all know who this force lies with. It is of course the dragon nation China. Rightly dubbed as the 'wild card' for commodities, Reuters believes that the country could slam on the monetary brakes and trigger a reversal in commodity prices.

We would tend to agree. We believe that a good amount of Chinese growth in recent times is stimulus driven. And when that stimulus stops, there could be a temporary slowdown in the Chinese economy. This slowdown could in turn impact commodity prices, mostly those of industrial metals. Thus, at the current juncture, it may not be wise to bet the house on commodity prices. Longer term though, the outlook remains as strong as ever. The inflationary scare from the US dollar and continued strong growth of emerging nations would continue to keep the commodities flag flying higher. However, we would like to caution that investing in commodities may not be everyone's cup of tea. Better to stick with one's circle of competence we believe.

02:30

According to the RBI, less than 10% of India's 600,000 villages have access to financial services. India has around 145 m households without access to basic banking services. This is the highest in the world. Financial inclusion was one of the UPA government's areas of concern. However, nothing much has changed on the ground. According to top bankers, and people from the finance ministry, banks are now likely to get a subsidy of Rs 140 for each no-frills account they open. These accounts have a zero minimum balance, and provide limited facilities. Around 50 m such accounts were opened from 2005-10 when the RBI first launched it. But only 5 m accounts are now active. Low volumes of transactions make them unviable and servicing costs were high.

Banks have an ambitious target of opening 50 m such accounts in 73,000 villages by 2012. This subsidy, if given, will cost the government Rs 7 bn, but will at least help banks cover some costs of reaching remote areas. Tying up with the UID scheme will also help banks meet know-your-customer norms and make account opening easier. Having money from rural India flow into the legitimate banking system is definitely good. We just hope that the subsidy helps meet the noble cause of banking the unbanked. And that it reaches the right pockets.

03:15

Companies that have good cash balances are always preferred as investments. Reason, these companies have the cushion to weather downfalls. But what happens when the downfalls continue like a never ending sliding board? Eventually the cash runs out. This is exactly what is likely to pan out in the case of PSU telecom major BSNL. The state owned company that was on the path of becoming a 'navratana' is on its way to becoming bankrupt. The company will run out of cash in another year if things don't become better.

The company which had an enormous cash balance of Rs 300 bn in 2000 now holds only Rs 50 bn as cash. However, the company's expected losses for this year are expected to be to the tune of Rs 40 bn. If things continue as it is, then it will run out of cash in the next one year itself. Flat revenues but continued higher expenses have been weighing the company down. Coupled with the heavy competition that marks the sector and additional costs involved in the rollout of the 3G services, things don't look too good for this PSU.

03:50

Surging food prices are not just contributing to the rise in inflation. They are also responsible for deepening the problem of poverty. In fact, the World Bank has stated that the recent rise in prices of food has pushed an estimated 44 m more people into extreme poverty. This is especially in developing countries and that too, over the past eight months. And the situation does not look like it is improving anytime soon. Easy liquidity has certainly played its part in pushing up food prices. But nature is also to blame. Major agricultural countries of the world have been severely impacted by floods, cyclones, winter storms and the like. The only silver lining in the cloud, if one can call it that, is that unlike during the 2007-2008 food crisis, higher prices have not yet affected all regions of the world. For instance, good harvests of staple foods in Sub-Saharan Africa have so far spared that region from rising prices. But that is hardly any consolation. Indeed, governments particularly in the emerging economies will have to find some way of resolving this issue lest it becomes a crisis bigger than the subprime one.

04:25

Concerns over food prices and interest rates kept the Indian indices close to the dotted line for most part of today's session. The BSE Sensex was trading around 14 points higher at the time of writing this. The mid and small cap indices were up 0.3% and 0.8% respectively. The Indian stock markets trailed the pack of gainers in Asia. The European markets have opened in the positive.

04:45

Today's investing mantra

"Mathematics is ordinarily considered as producing precise and dependable results; but in the stock market the more elaborate and abstruse the mathematics, the more uncertain and speculative are the conclusions we draw therefrom." - Benjamin Graham