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India's Biggest Advantage in Deep Danger - Views on News from Equitymaster
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The Equitymaster Research Digest

India's Biggest Advantage in Deep Danger
Mar 1, 2017

  • India's fundamentals similar to a commoditised business
  • Notebandi 1.0: Just the beginning...
  • Vivek's controversial prediction

In a recent issue of The 5 Minute WrapUp, I asked a question...

If India were a listed company, how would you rate its fundamentals and management quality?

My analysis said that India resembled a commoditised business...one that lacks pricing power.

India is neither at the forefront of technology and innovation...nor do we have the infrastructure or capacity to become a manufacturing powerhouse. We can't compete with the developed economies when it comes to product differentiation and quality...and we can't compete with China when it comes to large-scale manufacturing, speed, and productivity.

So, to compete in the global marketplace, India has to battle it out on the cost front...just like any commoditised business. That's where India does have some advantage: We have the largest labour pool on the planet and pretty low wage costs.

The success of India's IT industry is mainly based on a cost arbitrage.

Even the recent record-breaking launch of 104 satellites on a single flight by the Indian Space Research Organization (ISRO) was more a commercial achievement than a technological one. In fact, the chairman of ISRO reportedly said the low cost and reliability of the launch services were the main achievement.

Just as Indian IT was able to carve a niche in the global IT industry through cost arbitrage, it was widely believed the same phenomenon would play out for India's manufacturing industry as well. As Chinese wage costs keep rising, there would be a point at which the cost arbitrage would be enough for manufacturers to shift from China to India. And in turn, the expensive Chinese worker would be replaced by the low-cost Indian worker. This would create job opportunities for India's massive youth workforce entering the job market.

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