With population of Mexico and GDP of Singapore...

Jun 29, 2011

In this issue:
» A record slow down in capacity addition for India Inc.
» Can India's per capita GDP rise 10 times in 30 years?
» Why China's neighbours have reasons to worry?
» PSUs to get more performance oriented
» ...and more!
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"India is my country. All Indians are my brothers and sisters. I love my country and I am proud of its rich and varied heritage. I shall always strive to be worthy of it." Thus read the first few lines of our national pledge that most of us have been introduced to in school. But unfortunately the economics of diversity in India has only widened over the years. There is certainly no unity in the economic diversity amongst Indian states. Some of which have their population equal to the smaller nations in the world. The per capita GDP across various Indian states provides ample proof of that. Thus if every state in India would be a country, some of their GDPs would match that of Singapore and Qatar; while there also would be those matching Somalia's and the Bahamas'.

Interestingly the Economist has profiled Indian states on the basis of populations and GDPs equated to that of other countries. Uttar Pradesh for example can match itself to the world's fifth most populous country having the same number of residents as Brazil (190 m). Yet its economy would only be the size of Qatar, a tiny oil-rich state of fewer than 2 m people. That makes it a poor economy on a per capita GDP basis. Despite India's two decades of rapid growth, Uttar Pradesh's GDP per head is close to that of Kenya. At the same time Maharashtra that is the wealthiest state in terms of GDP, matching that of Singapore, has per capita GDP same as that of Sri Lanka. A population equal to that in Mexico (111 m) thus dents Maharashtra's per capita GDP numbers.

We do acknowledge the fact that it is impossible for a economy as large as ours to have equal development and distribution of wealth across states. Especially, when the focus is on capitalism. However, the sorry state of affairs in few Indian states even after decades of independence and reforms do put forth some pertinent questions. Can India's socio economic divide help it reap its demographic dividend? Can the nation put its most ample resource to the best of use despite such a wide gap in economic strata? Probably only once we can find the answers to these questions should India boast about its rising global economic status. Meanwhile, it would be best to assume that India's long term GDP growth can be only a shade better than in the past.

Do you think the economic divide between Indian states can be a growth deterrent for the economy? Please write in your comments or post them on our Facebook page.

 Chart of the day
India's manufacturing may have already topped agriculture in terms of contribution to GDP. But its contribution to employment generation is not commensurate. Its contribution to employment is least impressive at 12% of total workforce. Archaic labour laws have hurt employment growth in the sector for decades. Even the most labour intensive sectors such as textile and jewelry making have halved their labour requirement. In fact as per data from CSO and RBI, while the share of employment in manufacturing sector has grown from 13% to 21% over the past 2 decades, 80% of it has been in the unorganized segment.

Source: RBI, CSO

There is a very simple logic to economic growth. Take the case of a company at a micro-level or consider the entire economy, the only way to keep the growth rate ticking is by boosting sales. That in turn implies the need for building more capacity. And for doing that, the company needs to make capital investments.

To gauge the prospects of India's economic growth, it would be worthwhile to look at the capital investments that India Inc is making. So what does the latest available data say? Well, during the January-March quarter, investments in new projects were the lowest in seven quarters. On the contrary, the value of projects abandoned was the highest in eight straight quarters. To add further to the evidence, foreign direct investment (FDI) also declined by 14% year-on-year (YoY) in the financial year 2010-11.

Will India be able to deliver a growth rate of close to 9% in 2011-12? Given the direct correlation between capital investment and GDP (Gross Domestic Product) growth, we believe the growth will be lower than what is being expected.

Enough has already been said about how Asia has emerged as land of opportunities in recent years. And considering that its living standards are still low, it is likely to remain that way for quite some time to come. However, it would be a mistake to get blinded by optimism and lose sight of the risks involved. None greater than perhaps an armed conflict, the odds of which are getting stronger by the day. As per reports by an Australian think tank, Chinese military's aggressive postures in the sea lanes of Indo-Pacific Asia are not going down well with its neighbours. What more, it is also beginning to invite the ire of the US. So much so that the US Senate recently passed a resolution condemning China's use of force against nations like Vietnam and Philippines. Despite this, it looks unlikely that the dragon nation could take a backward step. In fact, it is all set to flex its military might even more as it prepares to unveil its first aircraft carrier. Clearly, China's neighbours, including India, have reasons to worry. After all, history is replete with examples of how a superpower's thirst for scarce resources and the need to show greater assertiveness has often led to armed confrontation. It has gone as far as even conflict in some cases. And who's to say it may not happen again.

With country GDP's growth hovering around 8% per annum, the projections of the statistics that supposedly measure the index of nation's growth are bound to come along. As per India's chief economic advisor, Mr Kaushik Basu, the country's per capita income could rise 10 times (to US$ 10,000) by 2039. The number assumes that India can keep growing at the rate of 8%-8.5% GDP per annum for the next 25 years. This may on the surface sound like a major breakthrough. But before we get euphoric; we need to put things in perspective. It is a different thing to come up with an average number statistically. However, considering the disparities in country, the actual growth will hardly be distributed evenly between the classes and masses. Again, the very assumption that India can keep growing at the rate of 8% or above for the next 25 years sounds naive and over ambitious. Last but not the least, the real indicator of growth is the quality of life rather than a per capita income number. The 8% growth assumption comes along with headline inflation at around 9% that shows no sign of easing. The hike in fuel prices, a tight fiscal budget deficit target of 4.6% of GDP , cut in government revenues from duties and high food prices cast a very dark shadow on these high and mighty projections. Hence, we believe it's time to tackle real issues over a shorter term. If these get sorted, a smooth rise in the long term will surely follow.

The International Monetary Fund (IMF) has received its first woman head in the form of Christine Lagarde, the French Finance Minister. She comes in succession of Dominique Strauss Kahn, who resigned last month. In her campaign tour to Asia, Lagarde acknowledged that countries like India and China deserve increased voting power, in line with their increased global economic clout. These countries have been longing for more power in the Fund. Having a fair shot at getting high level posts in the Fund will help their cause. Let's hope she sticks to her word, and continues to be a 'friend' to India.

The PSU (Public Sector Undertaking) employees have a bad reputation. Most people assume that they get rewarded irrespective whether they perform or not. Of course this is not true for all PSU employees but nonetheless it is true for some. The government is finally taking steps to change this. The Department of Public Enterprises plans to put in place a performance management system in the PSUs. This system would ensure that the salary hikes and other rewards are linked to the performance of the employees. Currently there is no system to monitor the performance of nearly 14.9 lakh employees of roughly 217 Public Sector Enterprises. Once this system is in place, the efficiency of PSUs would be all set to improve. After all it is the employees that make an organization.

Backed by strong cues from Asian markets and buying interest in FMCG, banking and commodity heavyweights, the benchmark indices in the Indian stock market featured amongst the top gainers in Asia today. At the time of writing, the BSE Sensex was trading higher by 200 points. Major Asian indices closed higher, with Japan and India leading the gainers. Europe has also opened on a positive note.

 Today's investing mantra
"Even when the underlying motive of purchase (of stocks) is mere speculative greed, human nature desires to conceal this unlovely impulse behind a screen of apparent logic and good sense." - Benjamin Graham

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5 Responses to "With population of Mexico and GDP of Singapore..."

Manoj Kumar

Jul 1, 2011

No instead of being a growth deterrent the economic divide between the states is going to be a growth accelerator as more and more states would realise with the example of others that they can also achieve it if the other state can.



Jun 29, 2011

We should be questioning the logic of our first PM of dividing the state based on language. Also introducing the multiparty concept which has divided India into fragments unimaginable. I think the current woes are all related to this. With the Indian brains and Chinese style of government, feel the combination will be really potent. A dream, just a wild day dream.


R V Subramanian

Jun 29, 2011

The deterrent to the growth of Indian Economy is certainly not the economic divide between the states, but the scarce/ limited availability of resourceon a global basis. If Indian percapita GDP were to match that of USA (today), one can assume that Indian Per Capita consumption will match the current Per Capita consumption of USA. With China ahead of us, where will the World go for resources, particularly raw material! I forsee a period of serious instability worldwide in the foreseeable future!



Jun 29, 2011

If we discount those Ambanis and others drawing above 50K per month, per capita calculations will only show that whatever the GDP, common man has become poorer day by day if inflation is taken into account. If India works on reducing population growth rate and ultimately it's population, the scenario may change for our next generation.
Our future generations otherwise are only poised to see more challenges at all levels.



Jun 29, 2011

Eq.Master Team,
The question posed in your write-up as under:
Do you think the economic divide between Indian states can be a growth deterrent for the economy?

I am prompted to cite the adage
which means “THE SEA / OCEAN CAN BE COMPARED WITH ANOTHER SEA/OCEAN and not with the earth or the Sky ??On the same analogy, the different states of India despite their differences of many facets, it is not proper to compare them with those of other countries/island city States whatever may be the similarities by way of equivalent populations etc etc. or other similar facets prevalent thereat??
I am also prompted to cite the instance of the four bulls which when faced with a charging Tiger untiedly repulsed the Tiger’s attack only when they unite to synergise!! On the same lines if and when the different STATES unite and SYNERGISE their strengths/resources (capital, human and natural??) can the Country/nation optimise their wealth production !!

I cite an eminent example : When all the five fingers separated as they are with gaps between them, if and only when they unitedly join to form the FIST
to create the Might of the FIST ??

I hasten to conclude with the Adage “” THE STRENGTH OF A CHAIN LIES IN ITS WEAKEST LINK or to put it in another way THE CHAIN IS AS STRONG AS ITS WEAKEST LINK ??

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