Thursday 31 May 2012

Brittle BRIC's - India

The BRIC's are the saviour of the Western world. Since 2008 and the huge financial crash that has devastated the West, the new rapidly industrialising countries with big populations have taken up the slack.

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.


Anonymous said...

FDI has collapsed.. etc Did Walmart eventually ditch their plans to swamp the land with their unwanted supermarkets? I lost sight of that story a few weeks ago.

Sebastian Weetabix said...

India's biggest problem is it has two big problems, infrastructure being the other one. Is it corrupt? Yes. But so is China... But in China you can move goods around.

Anonymous said...

It will be much easier for India to catch up with China once the China bubble has collapsed.

Electro-Kevin said...

The difference is that the Chinese and Indian govts don't much care that most of their people are poor. A fall in growth doesn't have the same political implications that it does here.

Anonymous said...

India is in bother. Many people fed up trying to make sense of 'Dave' in a Mumbai call-centre, bank account details being sold, staff are pricier than other emerging nations, their software is not of good quality (CMMI Level 5 is usually fiction)

Budgie said...

The ordinary Indians I met had exactly the same disdain for their politicians (and for the same reasons) as UK people for theirs. There was a cultural obsession with wearing a uniform and being able to boss people around.

You could hire a labourer for £1-00 a day. Be prepared to paddle in the public toilets. And never ever shake the hand of the shoe shine man - not unless you want a week on the bog.