A solid solution to India's employment issue?

Nov 1, 2011

In this issue:
» Developed world has not seen any growth
» Govt.'s solution to milking cash rich PSUs
» US bond returns gain over stocks
» Fiscal targets not likely to be met
» ...and more!
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The world has now reached a population of 7 billion, a fact that was repeatedly flashed by news channels yesterday. India's population at over 1 bn accounts for around 17% of the total and while a lot has been harped about how the demographic dividend favours the country, a major challenge exists in the youth gaining employment.

One solution to this is encouraging entrepreneurship in the country. Indeed, this could prove to be vital as India strives to reduce poverty through economic growth. Let's face it, not everyone can hope to secure employment with big corporations. Which leaves us with small and medium sized businesses. In fact, these are the largest nonfarm employers and account for 45% of manufacturing output, according to government data. Those small firms are adding some 3.3 m jobs per year. But this is not nearly enough to accommodate the roughly 13 m people entering India's job market.

But is the environment in India conducive enough to encourage more start-ups? Sadly, no. India ranks among the world's worst countries at encouraging entrepreneurs. According to World Bank, for ease of starting a business, India is ranked 166th out of 183 countries, just ahead of Angola. And there are many factors at play that thwart the ambitions of those who want to make it on their own. For starters, doing business in India is tough. Reams of red tape and poor infrastructure are serious obstacles which are quite difficult to overcome with inadequate financial resources. Further, big companies have privileged access to land and government contracts, a benefit not enjoyed by their smaller peers. Then there is the question of corruption and bribery, ills that have simply refused to go away as governments over the year continue to remain tainted with it. Then there is the question of the mindset of Indians who are averse to risk taking and would rather settle for secure salary paying jobs.

Of course, many of these problems are nothing new and there are companies which have managed to make a name for themselves despite these issues. But in an environment where the balance of power is gradually shifting towards the East and India is harbouring ambitions of becoming a global power to be reckoned with, these basic issues need to be addressed on an urgent basis. Entrepreneurship and innovation is an important way in which India can carve a name for itself in the global economy. And efforts by the government to encourage this will surely go a long way in changing the mindset of the Indians as well.

Do you think that encouraging entrepreneurship in India will ensure employment for the country's increasing workforce? Share with us or post your comments on our Facebook page.

 Chart of the day
The developed countries have not really been able to come out of their slump since the global financial crisis. As if spiraling debt was not enough, economic growth has also completely eluded them. Today's chart of the day shows that barring Germany, most of the developed world has seen GDP growth shrink since Q1, 2008. Growth in US has been flat since that time. Ironically, governments have borrowed to pump up the economic growth which has not taken off but has only burdened the former more.

Data Source: The Economist

The central government has not had much success so far this year with its disinvestment plans. The aim to garner Rs 400 bn by divesting stakes in PSUs has fallen flat with markets playing truant. The follow on offering of Power Finance Corp managed to raise just Rs 11 bn. Meanwhile, the growth in advance tax payments of the top 100 companies has been just 10% against an estimate of 18%. Rising oil subsidy bill and under recoveries of the oil marketing companies threaten to toss the fiscal balance out of gear. Meanwhile inflation and interest rates continue to impact corporate profitability and investor sentiments.

Hence, the government has arrived at the idea of milking cash rich PSU through share buy backs. The government has directed 10 ministries to look at 24 cash-rich PSUs for surpluses that are unlikely to be needed for investment in the next 12 months. The surpluses will then be used to buy back shares and the funds can then be used by the government to reduce the fiscal deficit.

We however, do not concur with the government's views that keeping surplus cash in the bank for a year is a bad idea. For one, surplus cash can be unproductive only when it is deployed in unprofitable ventures. Secondly, losing out cash surpluses at a time when liquidity is both tight and expensive is not a great option for the blue chip companies. Especially ones like ONGC, NTPC, BHEL and SAIL which are looking to add capacities without excessive leveraging. What is more, given the relatively low liquidity in most PSUs, the buyback may further put strain on the same. The government's plans to keep its fiscal position buoyant by auctioning policies or milking PSUs cannot keep it going year after year. A more feasible solution to India's fiscal problems is paramount.

If you, like us, believed that stocks are almost certainly a cinch to outperform bonds over a long term period, then this should come as a shocker to you. Bloomberg has reported that the biggest bond gains in almost a decade in the US have led to higher returns on government bonds than stocks over the past 30 years. In other words, had you been an investor in long term Government bonds thirty years back, you would have outperformed the US stock market index, S&P 500 by a few basis points on a CAGR basis.

It should be noted that this is the first time since 1861 that over a 30-year period, bonds have risen more than stocks. Worse still, the outperformance has caught most experts on the wrong foot as they proudly proclaimed that they wouldn't be caught dead owning a US Government bond. So, what could have possibly gone wrong? Well, we believe it is the extreme risk aversion. Investors seemed to have been so disillusioned with the US economic growth that they are unwilling to take exposure to stocks.

Furthermore, the fact that the US Fed has been keeping rates near zero also gave a significant push to bond yields and thus bring the same to record low levels. Having said that, will this outperformance continue? Looks unlikely. Compared to bonds, US stocks from a long term perspective seem very attractively priced right now and once economic growth returns, investors could make a beeline for stocks. This once again proves that it if you want to outperform markets over a long term period, doing opposite of what the majority is doing does help a lot.

Achieving fiscal prudence is a top agenda for all central bankers around the world. In the latest budget, India too had laid out a clear road map in order to plug the widening fiscal gap. However, slowing economy and falling tax receipts means that the deficit is likely to surpass the projected estimate of 4.6%. And this could have major implications on the economy.

Firstly, the pressure on interest rates would continue to prevail as government will have to borrow more in order to plug the deficit. This may crowd out private investments. Rising deficit could also mean that an increase in tax rates is just around the corner. Fall in revenues may induce the government to increase tax rates. And this may hurt spending and consumption. However, raising tax rates at a time when people are already reeling under pressure of food inflation would not be a populist measure. Hence, the tool of raising rates is effectively futile.

We believe that if the government is really keen on meeting its fiscal targets it has to end the subsidy era. However, considering the vote bank politics involved, we believe it is really difficult to arrive at an amicable solution here. But until that happens, the fiscal woes would continue to haunt the economy which would not only cash-strap the government but also impact the growth prospects.

Should the government keep infusing money into PSU banks just because of its promoter status? Should poorly performing banks qualify for additional funds? Well, not anymore. The finance ministry recently told state-run banks to achieve new standards to measure financial and operational efficiency. Banks which achieve the same will qualify for future cash injections. Three key performance measures will have to be improved. Namely the savings and current account ratio (CASA), employee-branch ratio and profit per employee. Government banks really need to improve their profitability and efficiency. This is especially in light of new private banks joining the fray. Only then will they be able to compete with aggressive private sector players.

In the meanwhile, the Indian stock markets were deep into the red in today's trading session. At the time of writing, the benchmark BSE Sensex was down by 200 points (1.1%). All the sectoral indices traded weak led by Metal and Banking stocks. Asian stock markets too were mostly trading down except China, Taiwan and South Korea.

 Today's investing mantra
"Investing is simple, but not easy." - Warren Buffett

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9 Responses to "A solid solution to India's employment issue?"


May 28, 2012

could u please brief out more on how good INFRASTRUCTURE would help out in creating employment oppurtunities..??


A Chopra

Nov 3, 2011

Plethora of rules, inspector raj and number of reports to be submitted to govt departments every month require an army of experts, how can SMEs grow or even exist in such atmosphere. If these are surviving it is just because of the hardiness of the Indian entrepreneurs, left to govt agencies these would closed long back.



Nov 2, 2011

yes, definitely provided government should pro actively provide conducive environment for the same & it also needs to be ensured that there doesn't exist any bribery or red tapism.



Nov 2, 2011

Yes, I completely agree with the author of this article. I am a retired secondary school teacher who is trying to do entrepreneurship
I came to the right conclusion that bribing, cheating, insincerity,lack of knowledge are some of the basic problems I came across with different types of people I am in contact. Eventhough I am overcoming many of these problems, they tense me many a times. Majority of our people are basically negative thinkers. The main concern should be how to develop self confidence, positive thinking and creativity among our large number of people.


SS Varadan

Nov 1, 2011

I agree with Sundar Rangan. I do not have statistics of how many enterpreneurs are there NOT counted by our Analysts/Census? How many Millions? What is the contribution of Road-side vendors to Indian GDP? Wherever NEW roads are built, economic activity zooms around Roads. (Customers stop by road-side not rail-side! Non interference of Govt. has brought Infosys like Corporations in India!
"Build Roads(infra) & Build Employment & Build economy"


Ashutosh Bose

Nov 1, 2011

'YES' to your question on employment generation and entreprenureship.


bs chauhan

Nov 1, 2011

Yes I agree with the author. The GOI should deeply ponder upon and work towards it.


Sundar Rangan

Nov 1, 2011

I strongly believe that we need to encourage people to become entrepreneurs and provide all possible support instead of discouraging them through red tapism and corruption. I cannot agree with you that Indians are averse to risk-taking and prefer salaried jobs. It is the barriers to entrepreneurship that forces individuals to think more in terms of employment. When u look at it that way, we must salute all those pan-bidi shop wallas, vada pav and bhel stall wallas who are self-employed and generate employment for at least one or two people within their family or circles. We have it in our genes to be entrepreneurs but govt policy, administration's apathy and deliberate obstacles put in by corrupt bureaucracy is responsible for non- blossoming of entrepreurism in India.


Amit Sengupta

Nov 1, 2011

Yes - we need more of SME-s & we need the political will from the powers that be. Why not corporatise the entire gamut of political activities- may be event managment companies- for organising yatras, rallies, chair throwing in parliamnet, creating road blockades, arranging go-slows & bandhs. We, the lesser mortals will then have a little less hypocrisy around us and will be able to guess and even punt what will be the index of living quality 2, 5 or 10 years hence.

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