Thursday, 31 May 2012
Brittle BRIC's - India
Now though, in a worrying development for the World economy, even the BRIC's are getting into trouble. Today a brief look at India.
The news today is that India's growth rate has fallen to 5.3% - its lowest in a decade. Of course though, with 20x the population of the UK and an economy smaller, growth should be much easier to achieve.
The big problem in India is corruption, bribery is endemic across the economy as is nepotism and the racial divide of the caste system. Plus, like many countries there Government is struggling with balancing budgets.
India's sectors are a good mix, with IT and Outsourcing having been strong, but with weak Western markets these industries are having to fight harder for work, not forgetting the Satyam scandal.
Why is the growth rate declining? One big factor is inflation, at 10% a year it is a huge factor. Wage inflation is a big part of this, well educated Indians do not want to work for nothing. This means though that for industries like outsourcing, the wage gap with the West is fast declining. With the West also pushing austerity and real wage falls, the gap could even close in about 5 years. Where then for a Country focused on low cost services and manufacturing?
Another challenge is the need to upgrade infrastructure to cope with the vastly growing population, these projects for utility, transport and health require cast sums. To get some of this money the Government has recently been pursuing Vodafone for a $2 billion tax settlement - it has tried to retrospectively change the law to capture this money. As a result, Foreign Direct Investment has collapsed, again pushing down the growth rate. India too is a hard country to invest in, many complex local laws are designed to discourage foreign ownership and investment, but without great resources to export this leaves little capital for investment.
The final challenge for India is social. In the UK much of the current debate is about the haves and have nots. In India this is problem is of a different order. New rich billionaires live in $100 million compounds a mile from slums where whole families live for generations on a set of paving stones.
The story of India will always be one of challenge, a vast country with a huge population - but with many advantages of an industrious culture and widespread use of English. Keeping India up with China may prove difficult though and maintaining the current rates of growth and development do seem like a herculean task.
Posted by CityUnslicker