Why India 2.0 cannot be software coded... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Why India 2.0 cannot be software coded... 

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In this issue:
» Accounting scandals cause selloff in Chinese stocks
» Child labour costing economy Rs 1.2 trillion
» Is the US already defaulting on its massive debt?
» No takers for studies in pure sciences
» ...and more!

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00:00
 
India's software coders and other service sector companies have had a major contribution to the economy's growth pattern. They have shouldered the responsibility of bringing the once agrarian economy in the reckoning of the fastest growers. But it seems that that they can no longer help India venture into the next phase of growth. One that calls for double digit economic output backed by sufficient employment and income parity.

The stir at Maruti's factory in Manesar is not the sole example of India's inability to align the future of its manufacturing sector with that of services. Lack of infrastructure, supply chains and raw material has weighed on the prospects of India's manufacturing sector for decades. The focus of the government and entrepreneurs on the export of services has for long denied the factories sufficient investment and skilled labour.

Meanwhile, services have certainly earned India the much needed forex. Lack of competition from China has meant that India exports services without artificially pegging its currency to make the sale cheaper. Also services have earned India a place amongst the economic powers that can take on the global heavyweights. Over the next few decades the country is expected to topple developed peers in consumption and investment growth. However, the fact remains that as the services start offering more value add, lesser will be scope of generating mass employment. And in a nation where population is one of the most abundant resources, unemployment and disparity of income levels can be acutely damaging.

India's low cost coding advantage has fuelled the notion that it might make the jump straight from an agricultural economy to one based on services. It will thus be able to bypass the manufacturing stage. But economists opine that no major economy has pulled off such a feat. Manufacturing accounts for roughly the same share of Indian economy as of peers Brazil and Russia. But what goes unnoticed is that unlike India, they are also big exporters of natural resources. Services account for about 55% of India's GDP but just 25% of employment. Agriculture on the other hand, employs 58% of workers while accounting for about 15% of the economy. The share of the latter has been shrinking for nearly a decade. Hence the need for employment generators is all the more acute. The way forward is to create manufacturing bases that can herald the economy to the next phase of prosperity. Investors need to look out for such niche businesses that can stand out in India's quest for manufacturing growth. We see no reason why over the next decade such entities cannot create loads of investor wealth with favorable policies and higher investments.

Do you think India's next phase of growth will be dominated by players in the manufacturing sector? Let us know your views or post them on our Facebook page.

01:15  Chart of the day
 
When it comes to disparity in income levels, look no further than India where the rich and the poorest of the poor continue to make headlines. While Indian millionaires outnumber their counterparts in most the developing world, the below poverty line population is also amongst the highest in the economy. As today's chart shows, percentage of population living with less than US$ 1.25 a day (World Bank definition) is highest in India as compared to Brazil, China and South Africa. Little wonder that Indian companies are seeking more business from countries like South Africa where the population has higher spending power.

Data source: OECD

01:50
 
Over the last couple of decades, China has achieved almost everything that a proud emerging nation can think of achieving. Superhighways, lightning fast trains, giant bridges, world's tallest skyscrapers...you name it and the dragon nation has delivered it in abundance. However, there is one area where it has not quite lived up to the expectations. The area of transparency that is. And yet another evidence of the same was on show recently. Apparently, huge number of Chinese shares traded in the US have sold off in recent times following a rash of accounting scandals. Even IPOs, where scrutiny is believed to be on the higher side have come under the spotlight. Now, this is one area where we believe that India has a huge edge over China. Agreed that there are accounting scandals in India as well. But we are of the view that a great majority of Indian companies are far more transparent and comply strictly with accounting rules as compared to their Chinese counterparts. This is perhaps the reason why Indian markets have managed to command a premium for quite some time now. And unless China makes some significant amends, we don't see any reason for the change in status quo.

02:35
 
Child labour is a serious problem plaguing our country. According to figures put forth by some NGO, there are about 60 m child labourers in India. Government estimates say that a meagre Rs 15 per day is spent on a child labourer. On the other hand, as per the national floor wage, an adult labourer must be compensated Rs 115 per day. That's a whopping difference of Rs 100 per day. Now if you take about 200 working days in a year, the employers save about Rs 1.2 trillion by employing children. That saving translates into a sweet profit for them. Even worse, most of that money does not come under the tax scanner. So, child labour is not only a grave social concern, but also a major economic problem.

03:00
 
China is the biggest holder of US Treasury debt. Little wonder then that the dragon nation has been closely monitoring the debt situation in the US, which is looking pretty bleak at the moment. So much so that a Chinese ratings agency has accused the US of defaulting on its massive debt. This is by allowing the dollar to weaken against other currencies and thereby eroding the wealth of creditors including China. The US is in a terrible quandary. It hardly has any room for more spends which is why the government is looking to raise its debt limit. This is obviously not garnering any support from the Republicans who want the government to come out with a debt reduction plan. Meanwhile, the US is in the danger of losing its top rating in debt. If that happens, borrowing costs for the US will rise. This will further worsen an already deteriorating debt situation. China has been vocal in protesting the dominance of the US dollar in the past and has shown inclination to diversify its currency holdings. But how it chooses to deal with the dilemma of its holdings in US Treasuries remains to be seen.

03:40
 
Education trends in India have witnessed a dynamic change. Unfortunately, not all of them are positive. Lack of interest in pure sciences is one of them. A heavy rush for admissions to such courses at pre-university level is quite a common sight. However, the trend hardly sustains at under graduate level. The frenzy for joining the professional courses has left no takers for pure sciences. No wonder our country's research and development activities have been left in a bad shape.

We obviously can't afford to ignore this trend for long. The Union Minister of State for Science and Technology has stated that the Government is making serious attempts to reverse the trend. The plan is to come up with more centres of scientific education. However, allocation of less than 1% of GDP for research and development is a huge constraint. He has recommended a hike to 1.5% of GDP in 12th 5-year plan. With due respect to his intentions, we all know that there is a huge gap between recommendation and implementation when it comes to Indian Government. In such a scenario, the onus is on private sector to be proactive in bringing pure sciences to the fore field and clear one more hurdle in the path of India's global power aspirations.

04:30
 
Due to weak global cues and profit booking in commodity, energy and pharma stocks, the benchmark indices in the Indian stock market made sporadic inroads into the positive territory in the closing hours. At the time of writing, the BSE Sensex was trading lower by 6 points. Major Asian indices closed lower, with the exception of Hong Kong and Korea. Europe has also opened on a negative note.

04:50  Today's investing mantra
"Partly, it's habit. Partly, it's just that stocks mean business, and owning businesses is much more interesting than owning gold or farmland. Besides, stocks are probably still the best of all the poor alternatives in an era of inflation - at least they are if you buy in at appropriate prices." - Warren Buffett
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4 Responses to "Why India 2.0 cannot be software coded..."

Deepak Nagda

Jun 26, 2011

Our manufacturing companies can certainly do much better on the export front, but only if the Govt improves the infrastructure - that is known to everyone and is common knowledge and comment. What is not realised is that the Govt also imposes very high transaction costs on our exporters. There is a plethora of rules and regulations to follow, and lakhs of rupees are locked in refunds which are sometimes denied on flimsy grounds necessitating costly appeals, besides high borrowing costs. Getting refunds and advance licences, and letters declaring obligations have been satisfied all have huge 'costs' which have to be paid, without which papers do not move at all. If all this is eased, our exporters will be more competitive, besides being able to devote efforts to technological upgradation and cultivation of markets instead of having to cope with the bureaucracy.

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captainjohann

Jun 14, 2011

Has the foreign exchange earned by software is used judiciously by Indian government? We should have made infrastructure which is PERMANENT instead of break build and break syndrome which we see in every Indian city which is continuously breaking and building. China has built permanent structures and our socalled freedom does not hold water in front of slow and corrupt judiciary.We have to buck up but our youth is fed on media created hype.

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DivKis01

Jun 14, 2011

The article suggests "The way forward is to create manufacturing bases that can herald the economy to the next phase of prosperity". While I am of a different opinion that increasing manufacturing might is the only solution for the India growth story to continue.

It is like saying to have a wholesome growth of a kid, only Multi Vitamins will not suffice hence you need to add Proteins to the diet to make it wholesome. While the fact is there are other components as well (carbs, fat etc.) which are required for the wholesome development of the body.

Just by improving manufacturing sector India cannot turn into India 2.0. For example even U.S. is not a manufacturing might as it cannot compete in terms of costs from China yet U.S. is the largest economy in the world. The solution is to find out other avenues where the real value can be created. Simply copying economic models from China or West is definitely not going to work for India.

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Royx

Jun 13, 2011

I belong to a company whose core job is manufacturing. I am a commercial guy and working in their Head Office. But in my office set up there are many Engineers with or without MBA who have shunned the manufacturing sector or taken a transfer from the company factory. The reasons are that manufacturing job is less glamorous, there are shift working hours, the money is less compared to that earned by people working out of Offices and last but maybe not the least, there are no or very minute percentage of females working in a factory. So mechanical, electrical, chemcical engineers who should be dirtying their hands in the factory are performing office jobs.

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