The Ir-Rationale of Euphoric India

Wherever and whatever I read on economy these days, I do get hold of at least few articles on India Euphoria and how India is supposed to grow by double digits for the next 20 years. The reasons these economist present are perfectly rationale and make it a sound theory for us to believe. Increasing working population, increasing public and private investments, changing demographics all point to same direction of consumption led growth story. But, aren't we missing a critical point here?

In the last 20 years after liberalization in 1991, the biggest contributor to India's economic growth has been the 'Services' sector, particularly IT and BPO services. If we think back, the question is Why these services were outsourced to India? And we all know the answer - Availability of cheap and abundant labor. The share of GDP from Services has increased from 41% in 1991 to 55% in 2010 indicating India's increased reliance on services.

The point is that as India develops with increase in GDP and per capita income, wages are surely going to increase significantly from present levels. And as wages grows, the cost advantage India holds in the outsourcing sector will start decreasing unless additional value is added to those services.

The fact of the matter here is that very little is being done for the value addition part. The Government is not emphasizing on vocational courses (that can help masses to get professional training specifically for jobs). Neither do MNCs seems very enthusiastic in providing advanced training to their employees and increase their training costs. Illustratively, Planning Commission report says that only 5% of youth (age group 20-24) undergo vocational training as compared to 60% in industrial countries.
Thus, the picture could sound and look quite gloomy, if you view it from a different angle.
Adios!!

RBI Dilemma

As I write this post, the Indian stock market continues bleeding over the steps taken by RBI yesterday to curb inflation, as they say. This RBI action and policy seems highly irrelevant to me, keeping in mind the nature of inflation at this point of time in India. The inflation is predominantly due to Supply side factors and is highly dependent on external factors. The RBI intent to reduce the demand is really not going to give substantial relief to the Government.

When I write this, I believe RBI Governors to be this cognizant of the situation and well averse in economics. Then why did this policy? The only reason I come out with is their hidden intent of reducing fiscal deficit through decrease in demand, primarily with imports. India is reeling through high amounts of fiscal deficit and it is going to shoot up seeing that there is no one time windfall gain like last year(It was 6.5% excluding the cash inflows of 3G auctions). The high debt levels of 78% makes Indian economy susceptible to economic shocks. Also, north bound oil prices are creating pressure on the Government to reduce the demand as a $10 rise in crude prices led to 0.3% increase in fiscal deficit of India.

Thus, this monetary policy of RBI is more governed by the Finance Ministry over reducing the nation's deficit. But the flip side is that it can lead to permanent/long term 'Crowding Out' of Private investments. The Growth rate estimates have declined to below 8% and could ruin the honeymoon period of the companies. But the valid question is whether double digit growth sustainable in an economy that is democratic, with limited/less natural resources (primarily energy) and an immature manufacturing sector? Moreover, Indian economy is highly dependent on the big developed countries for its revenues from service sector and it also does not peg its currency as China does to boost the exports. Keeping in mind these constraints, it is really a very difficult challenge for RBI to grow the economy by double digit while maintaining, if not reduce, the fiscal deficit at current levels.