India's big challenge: Man v/s Machine

In this issue:
» Could this destroy India's demographic dividend?
» A fund manager accuses the US Fed of 3 asset bubbles in 15 years
» Do not ignore this important parameter while evaluating risk
» ...and more!

00:00

If you had attended 'The Equitymaster Conferenc e 2015 - A Tale of Two Indias' at the end of January 2015, you may recall some insightful discussions on the future of the Indian economy and the 'Make in India' campaign.

After coming to power, the Narendra Modi-led government has laid a renewed focus on unleashing India's manufacturing potential and tapping into our demographic dividend. If this plan becomes a reality, India will emerge as one of the key global manufacturing hubs in the coming decade.

But things are easier said than done.

So far, India has largely been a services-driven economy. The manufacturing sector has been our weak link. On the other hand, our neighbouring country China, rules as the global manufacturing powerhouse.

One of the key global trends that is said to be in favour of India is the rapidly rising labour costs in China. This 'cost advantage' does make a good case for manufacturing in India, especially in industries which are labour-intensive.

Do you think China will happily pass over the manufacturing mantle to India? You would be in for a rude shock if you thought India's cost advantage was an unbreachable economic moat that we had laid claim on.

We came across a highly informative article in Business Standard by Subir Gokarn (former deputy governor of RBI) about the global trends in robots and what it means for India's manufacturing ambitions.

Interestingly, industrial robotics is one of the few sectors that have been growing at a fast clip despite the weakness in the global economy. It is estimated that about 230,000 robots were sold in 2014, 27% higher than in the previous year. In fact, robot sales have more than doubled in the last decade.

Now, who is buying up so many robots? It turns out China has emerged as the biggest buyer of industrial robots since 2013. Of the estimated 230,000 robots sold in 2014, over 56,000 were purchased by the dragon nation, taking the estimated stock of robots in China to about 180,000 at the end of 2014. But this may soon appear paltry if you consider its expansion plans over the next 2-3 years. By 2017, China is expected to house 430,000 robots. In other words, 22% of the world's robots will live in China.

Why does a country that has such a massive workforce resorting to buying robots for manufacturing? The answer is exactly what we highlighted earlier. China's rising wage costs are forcing manufacturers there to look for more cost-efficient means of production. The relative cost of robots, on the other hand, has been decreasing on account of economies of scale. At the same time, continuous improvements in technology aid productivity.

One may argue that the impact of robots may be limited to just a few sectors. So far, robots are largely employed in metal-forming industries like automobiles.

But well, you would be wrong to underestimate the possibility of robots penetrating traditionally labour-intensive sectors. As Mr Gokarn points out, the capabilities of robots are expanding at a very fast clip. In the coming times, they could replace humans from the assembly lines of sectors such as shirting and footwear, among others.

If India has to emerge as a global manufacturing hub, it will have to compete not only in terms of price, but also in terms of quality, efficiency and delivery. Will the Indian workforce match up with highly efficient robots in China? This question should not be ignored.

Finally, where does India stand in this robotics revolution? In 2014, India had a stock of about 12,000 robots. The number is expected to double by 2017. From our interactions with the managements of many companies, we have often heard them focus more and more on automation. In short, companies are looking at replacing human labour by machines wherever it is possible.

Now, this has big socio-political implications for a country like India that boasts of the largest working age population in the world.

If companies are keener about automation than employing the huge labour force at hand, how are we ever going to unlock the so-called demographic dividend? Let us know your comments or share your views in the Equitymaster Club.

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03:00

So far, a lot of well known investors have pointed to the fact that the US Fed has created what they believe is the biggest ever asset bubble. Now, throw the name of a fund manager called John Hussman into the mix. In fact, he has gone a step further. He has accused the Fed of not just one but three asset bubbles. And that too in a short span of fifteen years. Yes, that's right. He is of the view that by focusing on two variables, inflation and unemployment, the US Fed has missed the most important point, which is the risk to financial stability. And how does he feel this will end? Well, just as tragically as the previous bubbles if not more.

Now, there are quite a few people out there who know what the US Fed is up to. However, they still want to ride the trend and get out at the right time. And this right time as per them would be the Fed's rate hike announcements. Hussman though has warned investors of taking such an action at their own peril. For his examination of the worst collapses in history has revealed that markets have found to be coming apart even when the US Fed was lowering rates or holding them steady. Consequently, not fighting the Fed may not be a foolproof strategy after all. Well, we can't help but agree with Hussman.

03:50		Chart of the day

Management quality is one of the key criteria that investors should be watchful of while investing in equities. While a lot of that is subjective, there is one parameter that can give a quick glimpse of the same to some extent. What we are referring here to is 'promoter pledging'. And if the recent data is anything to go by, investors do have reasons to worry.

As per an article in The Economic Times Wealth, the total value of promoter shares pledged has gone up by 27% on a year on year basis with percentage of pledged shares at 43.4% in FY15. High promoter pledging as we all know, is a vicious circle difficult to come out of if the concerned stock witnesses a decline in the price. In such a scenario, more securities are demanded as margin, thus adding to the negative sentiments. In the worst case, the institutions may offload the pledged shares to recover their money, adding to the downward pressure on stock price. As such, investors should be careful of the leverage and pledging levels while investing in equities. And it is perhaps better to avoid the companies where pledging has not been in the interest of business but for personal use.

Rising Trend In Pledged Shares By Promoters A Worry

04:25

After a volatile start, the Indian stock markets inched higher through the trading session, but later conceded most of the gains. The BSE-Sensex closed marginally higher by 20.55 points (+0.07%). The sectoral indices that led the gains were realty, FMCG and capital goods. However, the healthcare index closed significantly lower.

04:45

Today's investing mantra

"Over time, you get the reputation you deserve... I believe the same is true for companies." - Warren Buffett