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Unemployment killing demographic dividend
Nov 25, 2014

When it comes to generous doses of optimism, India has had more of it in the past 6 months than in the past 7 years. Every analyst, economist, fund manager and consultant seems to be finding consensus in the opinion about India's brilliant economic prospects. So much so that some of the assumptions behind their sugar coated predictions make up for our daily dose of humour! Now, don't get us wrong! We are certainly not trying to play the devil's advocate by undermining India's economic road map. Nor are we naysayers to the possibility of India emerging as a much stronger economy over the next few decades. In fact we have identified seven very visible signs of India entering a Golden Decade Megatrend. But the attempt of the business media to glamorize India's ascent makes it ridiculous. Most of the predictions that we have read over the past few months make the India revival story sound like a fairytale. And that according to us is intended to build in greed amongst investors, rather than rational thinking.

Take the PwC report on India becoming a US$ 10 trillion economy for instance. Now the size of India's economy at the end of 2013 was about US$ 1.87 trillion. Expecting it to reach US$ 10 trillion (grow 5 times) is certainly not an impossible dream. However, hoping that the dream will be realized with over ambitious targets can lead to varied misconceptions.

The report expects India's GDP to cross the US$ 10 trillion mark by 2034. Two decades is a long time you would say. However the base assumption for this prediction is that the economy will grow at an average rate of over 9% per annum. The argument that if China could do this, why not India, also does not work here. For China's government enforced infrastructure spending and export driven model had a huge role to play in its growth. China managed to piggy back on the growth in the US and Europe during their heydays. India's growth, however, will be contrasted by a slowing global economy for a long time to come.

Most importantly, the 9% GDP growth estimate relies heavily on job creation. It expects the economy to create 10 to 12 million jobs every year. Given that the country currently produces 5 million graduates every year, 50% of which are found unemployable, the target seems ridiculously steep! The fact that the share of unemployment is highest amongst the more qualified population in India is most worrisome. And without enough efforts to adequately skill India's educated youth and make it employable, the higher GDP growth is never going to come.

Plus in its hurry to accelerate growth, the Indian economy will have to confront some herculean challenges. As Vivek Kaul has aptly put it in the Daily Reckoning, the quality of assets in PSU banks in India is itself a ticking time bomb!

Thus investors should read these predictions about the Indian economy while remaining aware about the challenges ahead. Buying stocks based on feel good assumptions could be fraught with risks. And giving in to the greed of participating in India's 10 trillion dollar growth story without paying heed to valuations, could do irreversible damage to your portfolio.

Do you find the prediction about India's GDP touching US$ 10 trillion by 2034 realistic? Let us know your comments or share your views in the Equitymaster Club.

Data source: Mint

This Chart Of The Day was published in The 5 Minute WrapUp - Our 'US$ 10 trillion' dream will not come true unless...

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