Indian Economy - News & Discussion 27 May 2012

[Arjun]

By the way, I completely agree with you, Suraj - that the fact that India is so dependent on overseas manufacturers for high-end equipment is outrageous. This is just not sustainable...and the situation needs to change through some policy measures. So, I am completely with you on developing a domestic high-end manufacturing capability. But the reason for that is less to do with its employment potential (for high-end manufacturing not really sure what the employment potential is) and more to do with strategic compulsions.

In fact when it comes to foreign brands - my read is that Indian retail consumers are not as enamored with overseas brands and prefer domestic brands, but when it comes to institutions & corporates the situation is the reverse. Indian corporates are more likely than China or other equivalent emerging markets to prefer overseas brands for high-end goods or services.

I had raised a question with someone on the China thread to debate this - but you seemed to want to put an end to it.

[member_20292]

Arjun; It *is* useful. People still use electricity, drive cars, take trains, and consume household goods now, just as they did back then. There's a reason why economies develop the way they do. All these rich countries with 70% services driven economies today, once had a substantially greater manufacturing sector. The US of the 1920s was the time of the auto industry in Detroit, the rail industry, the largest steel production capability in the world, and more.

All this talk about service delivery over the internet fails to address a larger picture - unless we have the manufacturing base to produce the tools and build our physical infrastructure, we pay western capital costs on the infrastructure and charge Indian rates for our services. Use the technological hurdles we face in the defense sector as a guideline of our technical base, and now consider a call center - everything from the PCs to LAN gear to telecom infrastructure to power generation and transmission equipment is procured externally, or has significant import content.

In other words, we import near finished products with dollar prices, and charge cheap Rupee labor rates to deliver services using them. Not just that, but this biases towards a weak Rupee for competitiveness, which further inflates the dollar cost of the support infrastructure. The math is not in our favor. While the IT/BPO industry may generate significant income, we also end up with a substantial $ import bill, which is why we barely break even on the balance of payments sheet - the IT/BPO inflows come under the services revenue bracket while the substantial component imports show up in the merchandise import bracket. All the infrastructure to support an utopian IT services economy doesn't appear out of thin air. Someone pays for it, and the western costs of that infrastructure shows up in the balance sheet somewhere as a substantial drain of national wealth.

That is not to say that IT services are not an option, but to underscore the fact that services are a tertiary sector. It utilizes or exchanges products created by the primary sector (agriculture) or the secondary sector (manufacturing). If we don't have a sufficient manufacturing base ourselves, we'll continue to pay the inflated prices of the goods and infrastructure needed to deliver those services. Even the barber who delivers services uses a scissors and comb that are manufactured somewhere.

Unless we also utilize our cheap labor to manufacture the goods needed and build out our infrastructure to support the associated services industry, we will remain in the current situation where we pay western costs of manufactured goods and charge Indian prices for services delivered, so that from an overall balance of trade perspective, we barely break even, and that too only when we count the substantial (~$60 billion) remittances from NRIs abroad. Every year we run a merchandise trade deficit of ~$150 billion and not all of it is covered by services exports and remittances.

This was a great post.

Suraj ji.

But, after a point of time, the compter bought to do the IT work costs less. It is totally paid for at once. The generators that get the electricity that run the computer is paid for. The cement that houses the office is paid for.

Now.
All you have is the worker. His computer. His client. And his coding. This is total output onlee!

And boss, outsourcing is getting more and more common. In fact, Indian companies are outsourcing a lot of work to other Indian firms. Coders joining at 7000 Rs per month.

[Suraj]

For example, referring to your sentence above - I would have thought Utilities (including power distribution) and rail transport providers would come under Services. Is that not how they are classified under the economic classifications?

This is not a question of classifying services provided by the equipment - the services themselves are services. Who builds the subway trains ? Mitsubishi, Bombardier or Alstom. The power equipment ? Hitachi or some other company. The supercritical boilers ? Doosan or some Chinese company. Even the fuel inputs are imported - crude oil, LNG or coal. How do we expect a UMPP running on imported coal built using imported boilers and power generation/transmission equipment to run cheap enough to produce energy at Indian prices when its inputs and mechanicals have a dollar cost ?

The arguments about cost of computers being paid off is a very narrow one. Once again - the tertiary sector depends on the primary and secondary sectors to function. This is not about a few coders or the pricetag of their beige box computer. The entire cost-vs-value add picture matters. When the manufactured instruments used to provide the services are imported, the primary mode of competitiveness is wage arbitration vs the west. This has a negative bias, i.e. there's not only an incentive to keep wages low, but it lowers wages for comparable labor in the west, worsening the marginal benefit.

Let me expand the coder thought a bit further. Those coder guys all make money and go out to buy things and be merry. They buy Absolut vodka, Sony TVs and VW Golfs. Since the hypothetical example has no manufacturing in India, all these are imported. Even in reality, though at least the VWs are manufactured in India, they have a significant import component. The end result as a larger picture: the equipment used by the workers, the power used by them, the goods they consume and the fuel used to run it, all have dollar costs, while their output has a Rupee cost. The competitiveness of this economic structure requires both the Rupee to be weak and for the workers to be paid as little as possible.

Now look at the overall picture and explain - where does the economic growth come from ? Remember, economic growth is just the excess return on invested input. All those imports are a negative number in the calculation. It's no surprise the balance of payments figure barely breaks even if at all, even including remittances. The net result ? Downward pressure on the Rupee, further increasing costs of dollar-priced inputs. and domestic inflation, which in turn leads to people wanting to buy gold, which in turn has a dollar price because it is imported...

To describe a completely different approach, consider what South Korea did in the 1960s - they not only focused on heavy industry and export-driven growth, but actively curtailed foreign involvement in their domestic industry *and* punitively taxed luxury consumption to both reduce imports and ensure people retained a substantial amount of savings/GDP, which in turn provided the high investment/GDP rates that generated high economic growth rates.

There is no substitute for a manufacturing base that produces our needs, and substantially addresses the equipment, infrastructure and energy needs of the services sector we utilize in the example here.

[member_20292]

So the conclusion is that the govt. has to focus on a fixed asset investment led infrastructure boom + labour law reform to have a sustained growth period in manufacturing ?

[Aditya_V]

So the conclusion is that the govt. has to focus on a fixed asset investment led infrastructure boom + labour law reform to have a sustained growth period in manufacturing ?

Exactly and big time reform in Excise, Custom, Sales Tax plus IT Tax reforms which tie any manufacturing set up in red tape with fines and penalties and bureaucratic procedure.

And to stop Unions and other trouble makers from completly torpedoing the economy in name of supporting the poor.

We also should try and reduce our raw material exports which is big mafia where wealth is generated for a few people at the cost of the nation.

[Theo_Fidel]

Suraj,

There are several problems with your argument.

Most of the foreign equipment was cheaper than equipment available in India even after dollar prices. Not just that most of the foreign suppliers gave the equipment to India at 0% interest type prices. How can you possibly beat that. In effect they are paying us to take their equipment as a form of manufacturing subsidy. It very much is good for India to take this cheap equipment and put it to use producing wealth for us.

WRT the coal imports, we have been through that already, much of the import is for coking coal making steel. Less than half is for the UMPP's which even after imports charge very low prices. Much of this thermal coal import is by Gujarat BTW, which does not have coal of its own. So do we now cut off power to Gujarat because coal should not be imported?

I think we have to get over this fetish of imports vs exports. In this respect no one remembers that China is also the world largest importer and its trade is almost balanced or at a slight deficit right now. Its enormous growth rate is due to its investment rate not its manufacturing rate.

As far as blaming inflation on the decline of the rupee, that does not make sense either. For decades Japan and So Ko also purposely depressed their currencies to absurd levels and still did not suffer from the inflation. The dollars value dropped an incredible 60% against a basket at one point and inflation was zilch. I think the data is not there to show a link. Inflation surged through India even when the dollar rate was fixed for instance. Most of the present inflation is food inflation. I posted the break down several pages back.

Finally we have such an incredible surplus of labor that it is a miracle people are willing to pay us anything at all for this. If not IT work those poor saps will be toiling in the field or wasting time a tea kaddai. I think it is wrong to look down on work being done at India prices. BTW manufacturing in India too is done at India prices. If anything they are forced to charge cheaper than China prices. Did you know that the worlds largest Backhoe factory is in India, somewhere in Haryana. And that it mostly services the Indian market?

[amit]

^^^^^

To add to the excellent points raised by Theo above, I'd like to add that manufacturing today is a different beast than it was during the time South Korea was ramping up its heavy industry and going for heavy import substitution.

Now it's all about how integrated your economy is to supply chains. It's not for nothing that Taiwan produces around 70 per cent of the notebooks that are sold around the world. And its not for nothing that the electronics industries in China, Taiwan and South Korea are enjoying growth - due to the global demand for smartphones and tablets - while other economies with highly developed electronics manufacturing capabilities are suffering. The supply chain for almost all the world's smartphones and tablets are concentrated in these three countries.

The reason I bring this point up is because even with Indian prices local companies would not be able to replicate most industries, simply because we missed the bus as far as integration into the global manufacturing supply chain goes. An iPhone can never be made in India at the same cost as it's done by Foxconn in China, not even by the Foxconn unit in Chennai.

This is a serious problem for our economy and I'm really not sure what's the solution to this. In the meantime, I guess services has been a life saver for the economy because it's bringing in some respectable growth. And the cost for imports, as Theo pointed out, is not as debilitating as conventional wisdom would make it out to be.

Another point that is often missed is that the vast majority of the services sector in India is NOT made up of call centres and help desk - the type of places where the typical IT coolie works. Most of it is made up of the vast number of small business that are scattered around the country. Yes Indians are probably far more entrepreneurial than the Chinese, the only difference - and that's a big one - is that they don't think big and are satisfied with just a comfortable existence. That means the first thought in a typical SME entrepreneur in China is how he/she can get on the export bandwagon. While the Indian counterpart is often satisfied with just supply the surrounding countryside.

I agree that at some point of time we do need to build up our manufacturing capability, as Suraj says. However, I suspect that this development will be more at high end manufacturing rather than low skilled, high volume workforce that has been China's mantra to success so far.

JMT

[Suraj]

Theo: In relative terms, all high end equipment is going to cost less to import if we have to build the manufacturing and technical knowhow to make it. Why bother making ships, planes and tanks ourselves ? It's a waste to spend billions on developing LCA and Arihant and then billions more to buy it when we can buy off the shelf, right ? Wrong...

Chinese trade balance runs from $100-300 billion surplus, e.g. $320 billion surplus in 2012, $165B the year before. Not only that, but they have the manufacturing ability to build what they need for their domestic infrastructure buildout. Further, they import raw material and export manufactured goods. They're also willing to subsidize the production of excess steel and cement because it generates cheap inputs to construction that benefits them economically. If we assume an economy that depends on IT coders, then it constitutes good policy to subsidize computer production to feed the hypothetical IT coder economy.

Please don't cherry pick one part of my post to rebut - I did not 'blame inflation on the decline of the rupee'. It is one of several contributing factors though, because oil is paid for in dollars and a weakening currency results in everything from food to energy costing more.

[lakshmikanth]

One thing I scratch my head on is this:

There are barriers to entry for manufacturing, capital being one. But what are the barriers to entry for Services? If that is not there, then there is no way we can protect ourselves from services shifting out to another country.

Also I believe a large part of the reason why services is so big is financial services takes a huge chunk ( I am not sure ). Is this so?

Another question: Is the service sector large enough to keep most of the people with low skills off the roads with some employment?

[Yogi_G]

The industrial revolution and the associated changes were all principally financed by "loot" until it came to a point where it became financially self-sufficient. Without European colonization and the sustained loot it generated over many centuries the industrial revolution would not have been possible as the root driving factor was increased materialism and need for more efficiency to complement improvement in weapons technology which made large scale colonization (a.k.a loot) possible.

Now in the pre industrial revolution days the wealth was largely generated by trade involving raw materials (spices, cotton, wood, livestock), agriculture and "Services". Services had its full spectrum in those days as well, my sub caste was formed out of entrepreneurial people who gave up priesthood and took up secular vocation mostly in accounts writing, administration etc which would mostly fall under "services". Right from the manual scavengers to the account writers to the court poets and astrologers to the mathematicians. Manufacturing was relegated to low volume production of utensils, weapons, furniture but never in the volumes and scale we see of today. India and China were the manufacturing power houses of the erstwhile pre-IR world order. Their share in it was significantly higher than their summed up population, a lot of whites on forums say that India and China made up for 70% of the world's manufacturing and economy because of their population but the statistics reveal otherwise.

So for now, for the chicken and egg question of "manufacturing" vs "services" the historical precedent is that wealth generated over thousands of years of services across its entire "complexity" spectrum financed an industrial revolution which resulted in a new world order and feudal societies becoming world powers in very short time. All in all, a distributed wealth structure which is sustainable ensures a good service industry, that sustainable wealth structure can be generated either by manufacturing or by services in itself. Services of today can spawn off need for new services in the future and the cycle goes on.

[Suraj]

amit, what are the significant or near insurmountable barriers to integrating a Foxconn production setup out of Chennai with the rest of the supply chain ?

[Yogi_G]

Someone mentioned here that the financial and banking sector in US were not useful. If regulated well, these institutions can actually enhance the spread of capital, for example the concept of repo rate actually leads to multiplication of capital, a part of which does not even exist in the first place. Securitization and the money it creates out of thin air is also a case in point. In essence, a strongly regulated banking and financial sector is a big boon for society especially capital intensive "manufacturing" industries.

[Aditya_V]

While talking about manufacturing we are only talking about Price cost, not about leads times and delay. Most products to be manufactured in India require a) imported content or b) components from a far away location 1000km. Given our infrasturcture and set up sometimes imported components come faster than domestic ones. We need to focus also on Bottlenecks

and above all the Poverty in one critical resource which MMS wants to export to Pakis.- Electricity

We need Power and lots of it if we are really going raise standard s in this country. Despite some GOI officials stating we are not going to Power surplus nation anytime in the near future.

[subhamoy.das]

subhamoy.das: You repeatedly refer to wealthy nations being primarily services-driven economies. Could you post data demonstrating that most of them were *always* services driven (upto or more than 70% services/GDP), even when their per-capita incomes and wealth levels were at India's level ? Sizeable economies/populations (say >25m people), please. Not city states like Dubai, HK or Singapore, even though both of those, especially HK and Singapore, were manufacturing hubs in the 1960s/70s, while Dubai was and still is a trade and transhipment hub.

Just because the countries took this route almost 100 years ago does not mean another country has to take the same route today. 100 years ago it was not possible to deliver service remotely - but today it is. 100 years ago there every thing about manfacturing was labor but today it CAD driven with human work shifting to computers in offices rather than machines in factories. So the old way of manufacturing simply does not exist. The new way of manufacturing requires more hours in offices and less in the factory and these office and factory are connected by network. So the path now is to move these offices to INDIA and the factories to where cheap manual labor and abudant land etc is available.

[subhamoy.das]

A whole lot of the service economy in the west is based on consumer binging on debt and now govt debt. It looks like it's coming to an end as this debt burden proves unsustainable. For now, it continues to mask the billowing out if the economy. There is no way the wage disparity between China and the US can continue indefinitely. Eventually the US will return to its roots as a manufacturing power house but not before a 30 to 40 % cut in living standards.

A lot of so called service industries like banking & financing produce nothing of value except a paper storm and in fact are a drain on the productive energies of society through the fiat money and other scams. It's less a service industry and more so a fraud industry from central banking on down.

We are not talking abour service industry but service component of GDP which includes any job outside of a factory and hence does not produce goods but rather fixes problems and will include CAD design work whose end result is a manufactured good in a factory.

[subhamoy.das]

Neshant, Welcome back!

This is OT but my opinion is that the USA in particular has already made its people take this 30% haircut. It is now cheaper to manufacturer BMW's in USA than anywhere else on the planet, mostly due to labor productivity.

-----------------------------------

Here are some charts on what Suraj asked.


Heres a chart on American per worker productivity.

This is exactly the point that productivity has risen because they are producing more with less man hours because - no marks for guessing - automation by computers. This immediately means that jobs created by manufacturing in the factories is coming down but the up steam jobs in the design and sales office is increasing. It is these jobs that we want because the factories will continue to have lesser and lesser number of human beings and will be a grave ward of jobs. And we want this model of building factories in INDIA? How many factories do we need to build - tens of millions ? And still we want the factory route to jobs?

[subhamoy.das]

Arjun; It *is* useful. People still use electricity, drive cars, take trains, and consume household goods now, just as they did back then. There's a reason why economies develop the way they do. All these rich countries with 70% services driven economies today, once had a substantially greater manufacturing sector. The US of the 1920s was the time of the auto industry in Detroit, the rail industry, the largest steel production capability in the world, and more.

All this talk about service delivery over the internet fails to address a larger picture - unless we have the manufacturing base to produce the tools and build our physical infrastructure, we pay western capital costs on the infrastructure and charge Indian rates for our services. Use the technological hurdles we face in the defense sector as a guideline of our technical base, and now consider a call center - everything from the PCs to LAN gear to telecom infrastructure to power generation and transmission equipment is procured externally, or has significant import content.

In other words, we import near finished products with dollar prices, and charge cheap Rupee labor rates to deliver services using them. Not just that, but this biases towards a weak Rupee for competitiveness, which further inflates the dollar cost of the support infrastructure. The math is not in our favor. While the IT/BPO industry may generate significant income, we also end up with a substantial $ import bill, which is why we barely break even on the balance of payments sheet - the IT/BPO inflows come under the services revenue bracket while the substantial component imports show up in the merchandise import bracket. All the infrastructure to support an utopian IT services economy doesn't appear out of thin air. Someone pays for it, and the western costs of that infrastructure shows up in the balance sheet somewhere as a substantial drain of national wealth.

That is not to say that IT services are not an option, but to underscore the fact that services are a tertiary sector. It utilizes or exchanges products created by the primary sector (agriculture) or the secondary sector (manufacturing). If we don't have a sufficient manufacturing base ourselves, we'll continue to pay the inflated prices of the goods and infrastructure needed to deliver those services. Even the barber who delivers services uses a scissors and comb that are manufactured somewhere.

Unless we also utilize our cheap labor to manufacture the goods needed and build out our infrastructure to support the associated services industry, we will remain in the current situation where we pay western costs of manufactured goods and charge Indian prices for services delivered, so that from an overall balance of trade perspective, we barely break even, and that too only when we count the substantial (~$60 billion) remittances from NRIs abroad. Every year we run a merchandise trade deficit of ~$150 billion and not all of it is covered by services exports and remittances.

SERVICE DELIVERY IS NOT ONLY SOFTWARE DEVELOPMENT OF CALL CENTER. It involves all aspects of manufacturing ALSO which happens outside of the factory - from design, to sell, to transport etc etc. FACTORIES are becoming more and more automated so the jobs created in factories is on down hill my friend. Wel come to the new economy where the offices rule and not the factories. We in INDIA want to get all offices to shift base here as long as the output of these offices can be fed to the remote factories in which ever place they are. In order to shift the offices you need to be a knowledge and higher education super power and not a factory super power today. That is the direction where GOVT after GOVT in India is working for for no reason - right? Factories will exists in imilted sense in India but offices will mush room.

[subhamoy.das]

Arjun; It *is* useful. People still use electricity, drive cars, take trains, and consume household goods now, just as they did back then.

Maybe we need to define what exactly comes under 'services' as used in the calculations of GDP percentage in the US and India.

For example, referring to your sentence above - I would have thought Utilities (including power distribution) and rail transport providers would come under Services. Is that not how they are classified under the economic classifications?

Service is anything produced outside of a factory. Transport, CAD design is as much a service as a hair cut only difference is that the cost of a fix or service differs.

[subhamoy.das]

Theo: In relative terms, all high end equipment is going to cost less to import if we have to build the manufacturing and technical knowhow to make it. Why bother making ships, planes and tanks ourselves ? It's a waste to spend billions on developing LCA and Arihant and then billions more to buy it when we can buy off the shelf, right ? Wrong...

Chinese trade balance runs from $100-300 billion surplus, e.g. $320 billion surplus in 2012, $165B the year before. Not only that, but they have the manufacturing ability to build what they need for their domestic infrastructure buildout. Further, they import raw material and export manufactured goods. They're also willing to subsidize the production of excess steel and cement because it generates cheap inputs to construction that benefits them economically. If we assume an economy that depends on IT coders, then it constitutes good policy to subsidize computer production to feed the hypothetical IT coder economy.

Please don't cherry pick one part of my post to rebut - I did not 'blame inflation on the decline of the rupee'. It is one of several contributing factors though, because oil is paid for in dollars and a weakening currency results in everything from food to energy costing more.

Tell me that why then CHINA with its numero uno position in manufacturing - read factories - has about USD PPP 2200.00 per month house hold consumption as INDIA - which fares no where in number of factories - to USD PPP 1700.00. Factories will not be able to take the 300m INDIAN house hold up but services these factories with service can and will and is doing it. How many factories do u want to build in INDIA - millions ? And how many more factories CHINA has to build to get to a USD PPP 10,000 level as in US? There will be no place left in CHINA if they build so many....

But we can surely easily build tons of offices and have skilled folks do work and ship work to the factories of the world provided they have the education and the rate to do so. CHIP manufacturing is an example.

[member_20292]

1. Mr Das, the tone of your posts is pretty uncool.

2. Consumption is low in China because the Chinese save + export.

[subhamoy.das]

BTW, I sit at the pinnacle of the service industry. I get paid handsomely for looking at data. But in the end, there is no real difference between me and the cleaner lady from Mexico who does my office. Both of us would not be paid unless real goods you can touch and feel are moving from one place to another.

There is a difference. Your job can be easily shifted to an office in INDIA - all we need is to find a office building and your replacement who has the right experience and education and willing to do the job at 1/2 your cost and this office building is integrated into your companies VPN. But the lady's job stays where it is becuse it does not involve a COMPUTER and does not need higher EDUCATION my friend. But if u were a worker in a factory - your job would have been gone to CHINA or MEXICO and INDIA will be more than happy to take your low paying job there and pollute the land!

[subhamoy.das]

1. Mr Das, the tone of your posts is pretty uncool.

2. Consumption is low in China because the Chinese save + export.

I have corrected some words. Thanks for pointing out.
Regarding the second point - based on the exchange with heech on the CHINESE forum - we could see a strong correlation between earnigs and expenditures of a CHINE working couple in SANGHAI and a INDIA couple in Gurgaon. Not sure that manufacturig has made life any better in CHINA than what service has in INDIA. I will give it to u that CHINE has 50% saving of GDP while INDIA has 33% ( a diff of 17% ) and CHINESE house hold comsumption is indeed 17% more than INDIA's so again pointing to the fact that manfucaturing did not generate great more wealth for the CHINESE joe but has surely polluated the land and the un-employment levels in both the countres are in 20%(s) even though CHINE officeially says 10%.

[subhamoy.das]

"
Kurien compared it to the efficiency improvements that defined the manufacturing industry in the United States. From supporting about 85 million manufacturing jobs in the 1970s, the sector has just about 17 million employees now. While part of it was because of work being outsourced to lower-cost destinations such as China, a lot of it was jobs eliminated because of productivity gains. "

Even software service jobs are getting impacted due to automation in areas like testing. Even more a pointer that knowledge driven and computer driven and problem solving driven service vertical is the ONLY savior for INDIA's job market.

[member_20292]

^^^^ Can't understand you Mr Das.

[amit]

amit, what are the significant or near insurmountable barriers to integrating a Foxconn production setup out of Chennai with the rest of the supply chain ?

First and foremost you got to remember that a Foxconn factory which is making iPhones or whatever electronic devices you can think of is just an assembly. All the thousands of components are made upstream and some of them are assembled in upstream projects as well.

Now you may ask why can't the same Foxconn get all these parts in Chennai and make the phone? That's because of margins. Apple is able to make a 50 per cent + margin on each iPhone sold because of the cost and the cost is lower in China because due to efficient supply chain: it costs far less to source products within China (and not all the components are made in China, till recently Samsung used to make 20% of the components that went into the iPhone - in Korea) than it do if they were to try to do the same in Chennai. And that's true for almost every other manufacturing category save for very high end heavy manufacturing. And you would notice that's one area that India does reasonably well.

Can India get integrated into the global supply chain? Sure it can but at a cost that may not make it worthwhile and I'm not just talking about dollar and cents. I have a friend who works in the semicon industry in Southeast Asia. He says intermediate products which are shipped from other countries arrive within one day, the customs clearance and infrastructure is so good.

Do you realise how much change has to happen in India before we can have that kind of efficiency? We often think its all about the GoI investing heavily in infrastructure and the rest will just follow. Sure physical infra is an important part of the equation but we also need new laws that make Customs clearance a breeze. We need a work ethic that makes moving components from another country into India a breeze. In fact we need a complete new work ethic. I've always maintained that corruption -bad as it is - is not as important as the lack of an understanding of how modern manufacturing units need to work (both among the management as well as workers) in keeping Indian low cost manufacturing at such low productive levels (save for a few islands of excellence - think auto component).

Now getting something to move from Kolkata to Mumbai is far more difficult than it is to, say, move a 28 nanometer silicon wafer from Singapore to China.

I'm sorry I'm convinced that high tech electronics manufacturing, the only manufacturing that is making big time money (think Samsung) has passed by India. Some years ago Intel was mulling a chip factory in India. Well it finally decided against it because of supply chain inefficiencies.

The problem is, I fear, a total lack of appreciation of the fact of just how important it is to be integrated into global supply chains. A lot of people, even here, crib about Nehruvian economics. Yet, unknowingly, their gut reaction to anything that results in dropping of trade barriers are exactly the same Nehruvian paranoia that resulted in our economic isolation for several decades. Just think of the typical reaction to FDI in retail.

In summary, doing the physical infra is daunting enough but it pales into significance before the task we have of changing mindset.

Sorry to write a depressing post but I really don't know what's the solution. I agree with your contention that we need largescale manufacturing. But I believe it's going to be a very difficult proposition.

[chola]

^^^^ Can't understand you Mr Das.

If you have an actual grasp of economics, you will not understand Das. Nothing he says make economic sense. I'm sorry but it is simply getting out of hand.

[chola]

Tell me that why then CHINA with its numero uno position in manufacturing - read factories - has about USD PPP 2200.00 per month house hold consumption as INDIA - which fares no where in number of factories - to USD PPP 1700.00. Factories will not be able to take the 300m INDIAN house hold up but services these factories with service can and will and is doing it. How many factories do u want to build in INDIA - millions ? And how many more factories CHINA has to build to get to a USD PPP 10,000 level as in US? There will be no place left in CHINA if they build so many....

But we can surely easily build tons of offices and have skilled folks do work and ship work to the factories of the world provided they have the education and the rate to do so. CHIP manufacturing is an example.

Das, why do you repeatedly bring up China in this thread? Especially since it is a prime example that proves everything you say is wrong.

In the 1970s, China and Bharat had same GDP. Since they became a manufacturing power, they've grown four-fold our size. Every major multi-national consumer brand out there sells more in China than in India. And not by a few percentage points but by many, many multiples.

GM sells 15 times more in China than in India, Apple 20 times more and you can go down the line.

The car is the benchmark of global consumption because it means broad-based discretionary income -- you don't have to buy a car but it is important as long as you have money and the rich can only buy so many. Just look at the sales figures.

http://thumbnails.visually.netdna-cdn.c ... f_w594.jpg

They bought nearly 9 times more cars with the same damn population. The same number of people but they buy consumer goods at 10 to 20 times our rate so how can you point to them as support for your services theory?

Again, services is a tertiary layer. It cannot create much or any wealth by its own, it redistributes wealth created by the primary and secondary layers.

[chola]

Sorry to write a depressing post but I really don't know what's the solution. I agree with your contention that we need largescale manufacturing. But I believe it's going to be a very difficult proposition.

http://online.wsj.com/article/SB1000142 ... 69774.html

Companies are already beginning to move manufacturing from China. It is not a trickle but flood because every year, the Chinese yuan will rise against the dollar under US pressure and the wages there are growing 20% per annum. Even Bangladesh is getting those jobs.

The infrastructure landscape looked just as daunting for Taiwan, South Korea, Japan and China itself when they began their journey into the global supply chain.

[member_20292]

Chola ji..

You are advising american companies as to how to attack the Chinese market, yes?

On an individual basis, you have mentioned on this forum that one can;

1. join an american company that adresses the chinese market.
2. If an Indian company, one can attack the Chinese market by going through an intermediary or a consultancy in HongKong.
3. If one is an Indian company that has its core strength in India, you generally mentioned that it is a good idea to focus on India, no matter how much your tongue salivates at the Chinese market.


I guess, one can add "Learn Chinese" to the above.

[amit]

Sorry to write a depressing post but I really don't know what's the solution. I agree with your contention that we need largescale manufacturing. But I believe it's going to be a very difficult proposition.

http://online.wsj.com/article/SB1000142 ... 69774.html

Companies are already beginning to move manufacturing from China. It is not a trickle but flood because every year, the Chinese yuan will rise against the dollar under US pressure and the wages there are growing 20% per annum. Even Bangladesh is getting those jobs.

The infrastructure landscape looked just as daunting for Taiwan, South Korea, Japan and China itself when they began their journey into the global supply chain.

Yes companies are moving manufacturing from China. However that does not imply they are moving to India and I do believe we are talking about India.

Regarding the challenges faced by the three countries you mentioned again you have a point. However you need to understand that the nature of manufacturing has changed drastically from the days China started out as a toy capital of the world or Japan used to be known as the place where all the shoddy and cheap goods of the world were made. Today as I said all manufacturing is about supply chain.

Another thing to consider: Japan and Korea and China after 1978 has been far more liberal in terms of giving access to foreign capital and big business than India of today. Remember Singur and Mamata Bannerjee? Remember she won an election even after that disgraceful show of intransigence. It's as much about changing mindsets as it is about the right policies and investment.

The three countries you mentioned did not have to face this problem either due to authoritarian regimes or due to the homogenous nature of the population.

It's useful to remember that economics never should be viewed in isolation to society. That's why I feel so pessimistic.

[subhamoy.das]

Post deleted due to duplication.

[subhamoy.das]

Das, why do you repeatedly bring up China in this thread? Especially since it is a prime example that proves everything you say is wrong.

In the 1970s, China and Bharat had same GDP. Since they became a manufacturing power, they've grown four-fold our size. Every major multi-national consumer brand out there sells more in China than in India. And not by a few percentage points but by many, many multiples.

GM sells 15 times more in China than in India, Apple 20 times more and you can go down the line.

The car is the benchmark of global consumption because it means broad-based discretionary income -- you don't have to buy a car but it is important as long as you have money and the rich can only buy so many. Just look at the sales figures.

http://thumbnails.visually.netdna-cdn.c ... f_w594.jpg

They bought nearly 9 times more cars with the same damn population. The same number of people but they buy consumer goods at 10 to 20 times our rate so how can you point to them as support for your services theory?

Again, services is a tertiary layer. It cannot create much or any wealth by its own, it redistributes wealth created by the primary and secondary layers.

Let us get the facts right.

CHINESE GDP ( PPP ) is 11T while Indian GDP is around 4T so CHINESE GDP is 2.5 times more and NOT 4 times as u reported. So their GDP per person is also around same multiples. So how can u justify that 9 time car sales? Who is buying these cars?

A good paying job in CHINA is rmb 5,000/ pm and a 1.5L good car costs around rmb 1,00,000 and hence a working couple of 2 can purchase one with one years pay. Just multiply these numbers by 10 and u you see that the prices and incomes are matching on the INDIA side. So this would mean that CHINA and India should have same number of cars unless CHINA has has 9 times such jobs than INDIA. Now take Tier I CITY in CHINA where such jobs are 30% which would mean that in INDIAN city like Mumbai < 3% of the jobs pay Rs 50,000/pm or more .

Another comparision with US. A good US monthly salary is 5,000 and similar car would cost 10,000. A couple of two working can buy such a car with 1 month pay. Now for the two countries to have the same number of cars such jobs in US should be 1/12th of those in CHINA which would mean that in NY < 2.5% of the jobs pay USD 5000 or more.

So your sales figures from CHINA does not match the supporting jobs needed to drive that kind of sales. If it does then the rest of the world jobs will be reduced to peanuts and they will be in deep poverty. So CHINESE jobs are not buying these cars - some ghosts are buying them like the ghost cities and malls.

How else would u explain this?

[RoyG]

Neshant welcome back! you'll love this...

Germany gold: Central bank to bring home some reserves

Germany's central bank is to bring back almost 700 tonnes of gold reserves it keeps in New York and Paris.

By 2020, half of its gold bars will be in its vaults, the Bundesbank said. It currently keeps less than a third at home.

The bars were originally taken out of Germany as a precaution against an invasion from the Soviet Union.

Central banks keep gold abroad so that it can be used to quickly buy foreign currency in times of crisis.

The Bundesbank will no longer keep any of its reserves in Paris, as both countries use the euro.

It will reduce the amount it holds in New York from 45% to 37% by the end of the decade.

No gold will be moved out of the Bank of England's vaults, however. It will still keep 13% of its total reserves in London, the German central bank said.

According to the BBC's Berlin correspondent, Stephen Evans, the German audit office has criticised the government for not keeping a proper track of the bars,

It has even suggested some of the bars may not have been checked to see if they are real, he added.

http://www.bbc.co.uk/news/business-21040214

[Gus]

That is the direction where GOVT after GOVT in India is working for for no reason - right? .

govt....working...

I'm sorry I'm convinced that high tech electronics manufacturing, the only manufacturing that is making big time money (think Samsung) has passed by India. Some years ago Intel was mulling a chip factory in India. Well it finally decided against it because of supply chain inefficiencies..

Well..I would be happy if we got even lo tech lo margin factories here. Something is better than nothing. The amount of young people coming out of 12th, diplomas, DOTE III (lower down the chain of preferred engg colleges..that don't get campus recruiting) etc are immense.

The idea that we will somehow leapfrog into a service economy and employ these people and ensure a robust economy and a social mobility etc..is beyond my comprehension.

[Theo_Fidel]

Suraj,

If you think I cherry picked your post my apologies.

I don't think so at all. The entire tone of your post was dollar prices cause inflation over India prices. If I misunderstood please clarify how. Take a look at this paragraph below. Look at the chain of consequences you posted.

Now look at the overall picture and explain - where does the economic growth come from ? Remember, economic growth is just the excess return on invested input. All those imports are a negative number in the calculation. It's no surprise the balance of payments figure barely breaks even if at all, even including remittances. The net result ? Downward pressure on the Rupee, further increasing costs of dollar-priced inputs. and domestic inflation, which in turn leads to people wanting to buy gold, which in turn has a dollar price because it is imported....

Again I don't disagree with you that we need to export more manufactured goods. And that more employment is required in India manufacturing. I think exporting high priced services are just as good and may come easier to India than churning out widgets. As Amit points out the supply chain issues will continue to be a problem for manufacturing export in India.

My point is that Indian companies are importing because it is far cheaper to do so. How can this be bad. Won't buying over expensive local equipment trigger inflation too. For instance BHEL's Sasan bid was at Rs 3.50 per unit using local equipment while Reliance quoted Rs 2 with imported equipment. How can that be bad. Esp. with things like power equipment and coal. I have pointed out earlier that coal imports will not be a problem once the USA enters the market with it 5 Trillion tons of good quality coal at roughly $60 per ton to an India port. They are gearing up in a big way to export right now.

The manufacturing data shows that Indian manufacturing is surging at 8%+ growth this year and growing consistently for over a decade now. With a regime of 12% interest money this staggering growth IMHO, probably topped out in growth rate. My view is manufacturers are completely focused on the local market because it is growing so rapidly. This is something I have been trying to get through to Chola as well during his periodic obsessions with the Chinese model. For instance returning to Earth moving equipment, as recently as 2003 the entire market for heavy earth moving equipment in India was 5,000 vehicles annually, Last year JBC company alone sold 100,000 earth moving units. One company. They are now frantically opening their 4th factory and struggling to keep up to be honest. If there ever comes a time when the domestic market saturates, that 100,000 unit capacity will get unleashed on the world market as well.

If we are to get Indian companies to focus on exports, with our limited/expensive cash regime, the domestic market will undoubtedly suffer, and likely triggering the very inflation you dread. Again the Chinese model has been export first then serve domestic market. Indian model is serve domestic market at ever cheap prices and export when you can or have surplus.

[RoyG]

Asia Gold: India buying evaporates due to tax hike, firm prices

SINGAPORE/MUMBAI: India's gold imports slowed to a trickle this week after the government raised import tariffs at the same time that global prices strengthened, and these higher prices also deterred purchases from elsewhere in Asia, traders said on Wednesday.

Asian buyers rushed to the market in early January to take advantage of gold prices which were below $1,630 an ounce, their lowest in more than four months.

Prices, however, have since risen to almost $1,700 an ounce, discouraging buyers who usually stock up on gold ahead of the Lunar New Year holidays in mid-February.

Most Indian buyers stocked up on gold in the first week of January, after the finance minister hinted that a duty hike is on the cards.

Last week, India raised import taxes on gold to 6 per cent from 4 per cent in a bid to curb imports to help rein in a record current account deficit, but industry experts said long-term gold demand is unlikely to waiver.

"We had comfortable sales in the last two months, but after the duty hike no one is interested," said Harshad Ajmera, proprietor of JJ Gold House, a wholesaler in Kolkata.

"Over the longer term, unofficial channels will replace official import channels as gold is required from birth till death in Indian tradition," he added. India is the world's biggest gold importer.

The benchmark gold futures contract on the Multi Commodity Exchange ( MCX) traded at 30,792 rupees per 10 grams, up from a one-month low of 30,758 rupees hit last week.

CHINA DEMAND EASES, SOME INDONESIA BUYING

Higher prices also slowed down China's gold buying two-and-a-half weeks before the Lunar New Year holiday during which gifts of gold jewellery, bars and coins are popular. Some traders said buyers had already stocked up enough in January.

"I wouldn't say demand from China is really good in comparison to the same time in the last few years," said a Hong Kong-based trader.

Spot gold stood at $1,691.29 an ounce by 0907 GMT, close to a one-month high of $1,695.76 hit in the previous session. The higher prices have teased out some scrap selling, dealers said.

A firmer rupiah has triggered some buying from Indonesia, a Singapore-based dealer said, while there was some buying and selling from Thailand.

"If the rupiah keeps strengthening, we should be able to see physical demand continue from Indonesia," she said.

Gold premiums in Singapore stood at $1.10 to $1.20 an ounce, little changed from last week, dealers said.

In Tokyo, selling in the physical market slowed after the yen strengthened against the dollar and lowered gold prices in the Japanese currency.

WEEK AHEAD

Investors will closely watch the Federal Reserve's policy meeting next week to gauge the central bank's attitude towards its bond purchase programme.

Any hint that the Fed was considering withdrawing such measures would deal a heavy blow to gold, which has attracted investors who were worried about currency debasement as a result of aggressive monetary easing.

http://economictimes.indiatimes.com/mar ... 147921.cms

Thank you Congress and RBI.

[nachiket]

Thank you Congress and RBI.

How is this bad? The detrimental effect of our relentless gold buying on our economy has been discussed here before. Our gold imports in monetary terms were just below oil imports. We can't keep that up. It is a drain on our forex reserves and it does nothing to promote growth. All it achieves is increasing our trade deficit and putting even more pressure on the already weak Rupee. If we want to decrease imports, gold should be the obvious first choice.

[amit]

The idea that we will somehow leapfrog into a service economy and employ these people and ensure a robust economy and a social mobility etc..is beyond my comprehension.

If you think this is what I've been writing in my posts then I'm afraid you haven't understood what I'm saying.

[Gus]

^saar but this is just treating the symptom. Why do people go for gold so much? Govt is doing nothing about that.

[prahaar]

Thank you Congress and RBI.

How is this bad? The detrimental effect of our relentless gold buying on our economy has been discussed here before. Our gold imports in monetary terms were just below oil imports. We can't keep that up. It is a drain on our forex reserves and it does nothing to promote growth. All it achieves is increasing our trade deficit and putting even more pressure on the already weak Rupee. If we want to decrease imports, gold should be the obvious first choice.

Unless you can replace gold with another investment instrument which has a granularity of Rs. 3500 (1 Gram), does not lose value rapidly due to inflation, can be converted to cash at a short notice, etc ( I can keep going); it is criminal to take away the single tool the aam aadmi has for making a safe investment. Government is doing just that, trying to hide its incompetence by making policies which hurt the aam aadmi the most.

Common people cannot buy MFs (they do not understand the complexity), they cannot buy land/house/apartment (too expensive), cannot keep it only as cash, tends to get spent on non-essentials more easily, FDs have a lock-in period which is much longer than selling gold. I would not like to replace all my gold with a piece of paper which can turn out to be a financial scam.

Do you think people should stop marrying? Or stop using gold in marriages? A marriage is not a fringe use case, it is a huge financial cost to the family and government does its bit by adding the burden just a bit more.