Indian Economy - News & Discussion 27 May 2012

[member_20292]

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.

ABSOLUTELY right.

India, being a democracy, is people led and not govt. led. I.E people/society is usually more high tech than the govt. and moves faster than the govt. This is true of the US, EU and most other democracies the world over.

This is at stark contrast to China, which is nationalist govt. filled at the top with their equivalent of IIT/IIM/IISc.

Hence, only when the 'gawaanrs' of India, in the 'pind' ask for the correct policies, will the govt. implement them. If the people of India only complain and 'woe-is-me' about the govt., the govt. cannot help but cover its ass and get defensive and fight petty battles and lose major wars.

The govt. of India = the people of India. Power distance is there. But as the poster pointed out, it is ABSOLUTELY has to be a ground up asking for capitalism, because it is certainly not going to come from the top.

We might take a full 200 years, a full industrial revolution to get to western GDP per capita levels.

Bring the masala-popcorn.

[Suraj]

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.

Then please stop quoting present day developed nations as an example - our path will depend on our imperatives. Their imperatives today are vastly different from ours today. They didn't achieve full employment and wealth because of services - they developed their economies over the course of a century or more and progressively developed an economic profile as it is today. I don't understand the purpose of quoting the US economy as an example - there's an active debate in the US questioning the validity of transferring manufacturing base and technology to east Asia.

There's no point in dissembling pointlessly about manufacturing vs services, by stating that everything done outside a factory is services and is therefore a sign of a services driven economy. Take an example of a car plant. Everything from sweeping the factory bathroom to driving the car into the transport truck is services. That doesn't make car manufacturing a services driven industry - none of those jobs would exist if the plant didn't exist.

There seems to be a romanticized notion in your narrative that portrays services as some highly innovative act, while manufacturing is grunt labour. That's not a useful portrayal. Both are necessary. Manufacturing creates things of value. Services utilize them, whether it's the broom in the sweeper's hand or the car in the driver's hand. Some aspects of both sectors involve innovation, but innovation in itself is not the preserve of one economic sector.

[Theo_Fidel]

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.

I don't agree that people buy gold because of inflation. It is almost entirely a status thing now. Folks drench themselves in gold because the advertising is relentless. Every hoarding, every movie, every serial shows women strutting their stuff in fancy gold jewelry. In the west it is $5,000 hand bags, in India it is gold. The folks who buy gold often don't even have the money to buy it, In TN a large bought on lease or down payment type terms. Very little is actual savings. If you compare the two media's the difference is striking. I was watching a movie on Raj TV the other day and in one hour I counted 14 adds for gold jewelry. The images shown were almost gold p0rn.

Simple folks are easily swayed. This is a social ill, very much on par with Alcohol. If you want to stay poor in India I recommend you accumulate gold. In fact I would say no one in India has gotten rich buying gold. Except the gold traders of course. There are unavoidable consequences to the nation for such addiction.

[nachiket]

Theo is right. Gold has become an addiction, just like alcohol in India. People's social standing is calculated on the amount of gold jewellery bought for their daughter/daughter-in-law and other family members during weddings. Humongous amounts of gold jewellery is bought for no reason other than looking good at family functions and showing off. The peer pressure is affecting even the poorer sections.

This was fine in the days when gold was being mined in India and was cheap. But it is an expense that we as a country can't keep up for long without seriously hurting our economy.

[Suraj]

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.

Amit: the issue about ancillary parts supply feeding the production line absolutely is true - a lot of the parts that go into the assembly of the device have to be imported because we don't make them. However, I still don't agree with the doom and gloom about this. Also, the iPhone as such represents the absolute pinnacle of this system, and it's not the best example because not everything requires such tight margins. Not only is the process not sticky (iPad production I believe, is partly moving to Brazil, a wealthier nation with greater costs) but there's nothing that suggests that the infrastructural or bureaucratic bottlenecks are insurmountable and cannot be developed outside of one country.

As an example, Nokia's Chennai plant has produced about 750 million cellphones now (the last news report I see is 500m produced in May 2011), with 40-50% exported). It may not mirror the aggressive time to market imperatives of Apple, but there are existing examples of both telecom and auto production where we have successfully developed and run a manufacturing and export line.

[Suraj]

Theo: you're only misunderstanding my post in the context of reading mine in isolation, whereas I'm specifically addressing das' and mahadebhu's services/IT oriented economy ideal. I just pointed out that in their hypothetical economic framework, all their equipment costs are almost all in dollars, but their USP was Rupee prices for their labor, and such a framework is not sustainable unless they produce things of value in that hypothetical economy. Please don't conflate that with a general statement about the current economy.

As far as gold addiction goes, as costly as it is in nominal dollars, it's a FAR better addiction than alcohol. Considering fiat currency debasement across the world, holding gold in local hands is useful in the long run, even though it's also a drain of nominal wealth today into something that has no actual productive value in itself, outside of a few niche uses.

[vishvak]

In USA guns are an addiction. But gold is not an addiction. To buy gold people pay money for it unlike wasteful gun culture that is at worst genocidal and at best competitive.

In fact, the trend since last 6 month shows that price of gold has increased so it was indeed a good choice. Addiction does not create wealth anyway.

Never understood why people give a damn about gold bought by others if it is least reactive of all metals.

[amit]

Amit: the issue about ancillary parts supply feeding the production line absolutely is true - a lot of the parts that go into the assembly of the device have to be imported because we don't make them. However, I still don't agree with the doom and gloom about this. Also, the iPhone as such represents the absolute pinnacle of this system, and it's not the best example because not everything requires such tight margins. Not only is the process not sticky (iPad production I believe, is partly moving to Brazil, a wealthier nation with greater costs) but there's nothing that suggests that the infrastructural or bureaucratic bottlenecks are insurmountable and cannot be developed outside of one country.

As an example, Nokia's Chennai plant has produced about 750 million cellphones now (the last news report I see is 500m produced in May 2011), with 40-50% exported). It may not mirror the aggressive time to market imperatives of Apple, but there are existing examples of both telecom and auto production where we have successfully developed and run a manufacturing and export line.

Suraj,

From a purely economic perspective I agree with you that even though it's a tall ask, the problems are not insurmountable in as far as integrating India to the global manufacturing supply chain.

My pessimism stems from the fact that there's no broad economic consensus on the imperative of doing so immediately both in the political spectrum as well as in societal perception. Since we do not have a top down authoritarian system who's gong to bell the cat and take the difficult decisions and impose the short term adjustment pains that are required to give a new (and better) direction to our economic trajectory?

Like I said before the Nehuruvian model is the subject of much derision. Yet folks who are the most trenchant critics use the same Nehuruvian constructs to denounce any attempt at liberalisation. A good example is what the Bombay Club raised in the early 1990s: to wit that liberalisation and allowing foreign players into India would destroy the local industry. And look at what happened.

Circa 2012: FDI in retail will destroy the livelihoods of millions of farmers and small store owners and this despite empirical evidence which points to the exact opposite.

The walls that need to be scaled are not economic but mental blocks.

A note: The 750 million phones made by Nokia is a minuscule fraction of the kind of volumes that Foxconn ships (not just Apple products but other major brands as well). We don't have the systems and infra to attract that kind of volumes.

Also the Brazil manufacturing by Apple is a load of hogwash to appease the critics of Apple for putting up with the workers' abuses that are routine in Foxconn and which we discussed in depth in the China thread some time ago.

[amit]

Regarding the debate about taxes on gold:

A Bloomberg report says this:

About 80 percent of India’s current-account deficit, the broadest measure of trade, tracking goods, services and investment income, is due to gold imports, according to the Reserve Bank of India.

Oil and gold are the top two import items which skew our balance of payments. Oil at least has a productive use in as much as it is used to drive the economic levers in the country. Gold, on the other hand, is bought for hoarding purposes and sits most of the time in bank lockers and at home.

I really don't see how the raising of taxes to deter this drain on our current account is considered a huge government conspiracy against the aam admi. If anyone wants to buy gold then let them pay more for it (via the taxes). I would be happy if the high prices of gold deters some buyers and, instead, they use the money in some economically productive ways like buying a car or building a house or putting it in a fixed deposit earning 7-8 per cent interest - all these activities are economically beneficial to the economy. IMO buying gold and putting it into lockers, sometimes for decades is the worst form of hoarding. If you consider the amount of time which a person usually holds gold (that is from the time they buy it to the time they sell) then almost any other form of savings/investment would give better yields.

And yes the elephant in the room which nobody talks about is the fact that most of gold purchases (that is the really big ones) is done with black money. Buying gold is a very convenient means to turn black money into white.

JMT

[amit]

Here's a good read on the merits and otherwise of investing in gold:

The arguments for and against investing in gold

An interesting conclusion in the article:

In summary, the authors concluded:

* The real price of gold is very high compared to historical standards
* There's little evidence that gold has been an effective hedge against unexpected inflation whether measured in the short- or long-term
* Gold isn't a currency hedge
* There's no proof that gold is a good investment when real returns on other assets are low
* If key emerging market countries owned gold on levels like more developed markets, the price of gold would likely rise

Another point that should noted: Most Indian middle class families buy gold in the form of jewellery (22 or 21 carat). When they sell a lot margin is deducted in terms of weight (15-25 per cent in many cases) on account of "purity" concerns and also deduction of "making charges". That debases the gold as an investment option.

The gold futures market works on 24 carat gold bars. How many aam admi types have the capacity to buy a sufficient amount of such gold bars and have the wherewithal to sell them at the proper place and buyer to reap an investment benefit?

[RoyG]

Mr FM, gold isn’t the problem, the rupee is. Fix that

Jan 5, 2013

The Indian and his/her love for gold will not change anytime soon. The FM in a misguided belief attributes India’s weak currency and rising current account deficit (CAD) to the Indian’s love for gold.

The FM believes that India’s foreign exchange reserves would have gone up by $10.5 billion if gold imports were to have halved. The FM also believes that India’s CAD and the rupee value will improve if gold imports were to be curbed. Unfortunately, even RBI wants gold imports curbed in order to manage the rupee (INR) better.

The FM and the RBI could never go more wrong in their understanding of gold. In fact the rise in the price of gold in India is more due to INR depreciation than demand. Table below gives the performance of gold in USD and INR terms from peaks seen in August 2011.

Gold prices in USD terms are down 11.9 percent since August 2011, reflecting the money moving away from gold
Gold prices in USD terms are down 11.9 percent since August 2011, reflecting the money moving away from gold (seen as a safe have asset in times of crisis) to equities. US equities are up 18 percent since August 2011 as worries of market collapse on the eurozone debt crisis ebbed away. In the same period the INR has depreciated by 19.5 percent against the USD on the back of inflation in India that averaged over 9 percent in 2011.

The rise in the price of gold in India is more due to INR depreciation than demand. Reuters
India’s fiscal deficit rose to 5.9 percent in the 2011-12 period from levels of 4.9 percent in 2010-11. The CAD rose from 2.7 percent in 2010-11 to 4.2 percent in 2011-12. Gold prices did not cause the fall in the value of the INR. The rise in inflation, fiscal deficit and current account deficit caused the INR to fall. Lack of governance of the economy caused the rise in inflation, fiscal deficit and current account deficit.

The average India’s demand for gold did not cause the rise in gold prices in INR terms. In a globalised world, assuming that the INR was steady against the USD, rising demand for gold in India would normally cause gold prices to rise globally as demand outstrips supply. If India’s demand for gold is met by increased production or by sales of central banks or other major holders of gold, gold prices will stay steady. However, the fact is that the INR was not steady and has depreciated sharply against the USD and this depreciation has led to import prices of gold becoming higher, leading to rising gold prices in INR terms.

The government imposing higher duties on gold imports is only making imports more expensive as the INR is showing no signs of strength against the USD. The government should focus its attention on strengthening the INR to lower domestic prices of gold. Gold demand in India will be met by market forces globally and if investors believe that gold will be a severe underperformer going forward they will sell gladly sell gold to Indians.

The INR is the problem, how to fix it?

The latest CAD data for the second quarter of fiscal 2012-13 is worrying the government and the RBI no end. CAD at 5.4 percent of GDP is highest on record and has forced the government to up its CAD forecast for 2012-13 from 3.5 percent of GDP to 4.2 percent of GDP, which is similar to levels seen in 2011-12. The INR is trading just 5 percent above the lows seen in June 2012, reflecting the high CAD.

The government has to focus on governance for sustained strength in the INR. Increasing debt limits for FIIs and encouraging capital flows is more short term in nature. Long term sustenance of the INR depends on government efforts to tackle inflation, subsidies, and deficits. Curbing gold imports will definitely not help tackle the weak INR in any way. It may only serve to increase speculative activity in gold leading to more headaches for policy makers.

http://www.firstpost.com/business/mr-fm ... 78765.html

[Suraj]

Amit, I struggle to understand what metrics you're using and what your definition of a successful or failed policy is. In response to your earlier reference to Apple/Foxconn I responded that they constituted the absolute cutting edge, from ODM design tolerances to fast delivery. That is akin to comparing the LCA program to the Raptor's. Now you mention that 750m phones is a fraction of Foxconn's output. Granted. So what's the goal here ? The plant came up to manufacture for the Indian market. Productivity was so good that they progressively started exporting 20% of output, upto around 50% of output now (per most recent news reports).

As much as an authoritarian system may be able to command the construction of the Shanghai Yangshan deep water port and the Donghai bridge connecting it, as well as roadways and customs clearance to Pudong Airport, our own exports have also grown significantly in dollar terms. Our exports were $100 billion at the start of fiscal 2006-07 (Apr 2006). They were $310B at the start of the current fiscal (Apr 2012), giving a 21% CAGR. For the current fiscal, Apr-Dec exports have shown a 25% growth over previous fiscal, according to news reports. These are not bad numbers.

However, our exports are 'dense' in value - we export machinery/manufactured goods, gems and jewelry, chemicals and textiles - things that don't take a huge amount of space. It is reflected in the fact that our containerized shipping volume is very low, compared to PRC which produces tons of cheap goods that need a lot of containers and port capacity to ship out.

I don't know about the Apple Brazil project being a feint, but knowing someone who actually sat across the table on our side during the Intel fab discussions, I will just say the way you portrayed it isn't quite what happened behind closed doors...

[Gus]

In fact I would say no one in India has gotten rich buying gold.

And the counter argument is no one has lost money buying gold. Even with depreciation over time due to erosion, wastage, making charges etc.

Say, I have 1 lac saved over a few months. What am I going to put that in? I know gold is only going to go up, so I buy that. This is the logic of most middle class people here.

Stocks are great only for people who are in the know. Ordinary people have no trust in the system. Real estate is gone crazy and not to be trusted either, unless you are in the know and have connections. Bank interests are ok, but there is only so much you can put in that because the interests will never match inflation.

I know it is bad for economy from money gone for imports and money locked up in non-productive assets etc. The solution is to have a system that people trust to invest in many areas. Not to restrict supply or increase price with taxes.

People won't understand these things. They see price increase, they are only going to say "SEE I TOLD YOU, price has increased, BUY NOWWWWWW" and run to the nearest shop.

[subhamoy.das]

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.

In one area where GOI has been delivering is - education. The mid day meal was a huge driver for INDIA to be having 90m kids in secondary school in second postion tailing CHINA by just 10% ( CHINA has 100m ). In higher education INDIA produces 11% of world grads behind US 18% and CHINA 14%. So we are doing pretty good in education now need to land the export oriented service jobs and some leve of local maufacturing to support this service. That is the model I am convinced for INDIA with its geo-political-historical ground realites which cannot be wished away. BTW, we get the worlds highest remmittence - another example of service exported. Go to Kerala and u will see the effect.

[subhamoy.das]

There's no point in dissembling pointlessly about manufacturing vs services, by stating that everything done outside a factory is services and is therefore a sign of a services driven economy. Take an example of a car plant. Everything from sweeping the factory bathroom to driving the car into the transport truck is services. That doesn't make car manufacturing a services driven industry - none of those jobs would exist if the plant didn't exist.

Yes - these are manufacturing service jobs just like u have software development service jobs and financial service jobs. No body is saying that service jobs exists in vaccume but what I am saying is that those manufacturing service jobs - which are not peformed in the factory but in a office like desing, modelling, testing, sales marketing - can be perfomed any where in the world and INDIA has the advantage in terms of education and local physical industry to grab those and has already grabbed some of those jobs in electronics, autombiles, erection and construciton, mechanicals, electrical etc.

There seems to be a romanticized notion in your narrative that portrays services as some highly innovative act, while manufacturing is grunt labour. That's not a useful portrayal. Both are necessary. Manufacturing creates things of value. Services utilize them, whether it's the broom in the sweeper's hand or the car in the driver's hand. Some aspects of both sectors involve innovation, but innovation in itself is not the preserve of one economic sector.

Yes, the innovation was done in an office in front of a computer simulated model of the broom or the car and NOT in the factory which just assembles it via automation and physical machines like lathes, CNC, robots etc. And hence innovation is the sole pre-rogative of offices (service) and not factories( production).

[Singha]

production also needs a lot of knowledge and skills to translate protos and paper designs into repeatable units. moreover it brings in revenue and builds scale which can help the design side of the company. without production there is no market for all the machines and no way to build products for customers.

I dont think a country the population of india can go without manufacturing. we'd be crippled for lack of ability to make something even if we can design it. and its already showing in a lot of strategic areas.

[subhamoy.das]

India has already a good amount of production and ranks in top 10 and is also expanding. We should do that. Nobody is saying we should have 0 production. But we should do more of design ( 70% of GDP ) and less of production ( 30% or more ). The reasons are obvous because of the quality and the number of jobs it will generate in land like INDIA and keeping in mind the automation level of production. Design will be very hard to automate because it takes human intelligence to model and design and can be assited by autmation but replaced. Desing jobs are here to stay and pays high and large in number where production jobs will reduce and pays less. So over all INDIA needs more of design jobs to drive consumerism. I am convinced about this. Time will only say - so let us wait for next 10 years and I could be proven wrong but for now I am convinced that INDIA will be knowledge or design economy rather than a production economy.

[Suraj]

Yes, the innovation was done in an office in front of a computer simulated model of the broom or the car and NOT in the factory which just assembles it via automation and physical machines like lathes, CNC, robots etc. And hence innovation is the sole pre-rogative of offices (service) and not factories( production).

The design work can include work optimizing on the manufacturing line. For example, a better steel furnace design or operating mechanism. It can involve fluid dynamics computations to streamline the aerodynamics of a car. It can develop processes enabling line workers to rapidly triage faulty assembly line output 'live' without shutting down the line, by isolating the defective manufactured items and continuing with the clean ones. Or it can assist HR in determining a breakeven point in staffing and pay level beyond which labour is more expensive than investing in greater automation in a factory.

All of these examples entail creating things of value, or adding value, which adds to economic growth both from the value addition from making that object *and* doing so cheaply with Indian labour costs. When you are just delivering services without making things, your only advantage is your wage arbitrage spread, and such an economic framework provides low margin for economic growth. Your equipment costs will be in dollars, and your effort priced in rupees, with no built-in means to gain wealth or even compete, beyond wage arbitrage. Unlike services supported by manufacturing, you can't make better and higher value things to become richer, because you're not making anything - someone else gains all the margin from your work. You can't pay more for better work because your advantage lies solely in not paying much. You have no means to bargain because you are not making anything, someone else is, while you're just the outsourced guys competing on wage differential, trying not to be forced out by cheaper Vietnamese or Bangladeshis.

Arbitrarily quoting random percentages like 70% services / 30% manufacturing because one is allegedly more innovative is meaningless. Making decisions based on which is the cooler one is fine if you're just buying a cellphone, but not for the economy at large. Thankfully such thinking hasn't happened, and doesn't look like anyone will ever do so either.

[member_20292]

^^^ You are narrowing down the scope of outsourcing work in general Suraj ji.

When I buy an expensive phone from apple, it is also outsourcing in a generic sense.

Indian IT companies, hitherto have competed on cost savings. Slowly, they compete on value too.

[Arjun]

Unlike services supported by manufacturing, you can't make better and higher value things to become richer, because you're not making anything - someone else gains all the margin from your work.

The entity keeping the margin is the one that owns "Intellectual Property" in the form of patents or trademarks or brands etc...There are many virtual life sciences / biotech firms who own just the patents and outsource just about everything else. They outsource the manufacturing to low-cost manufacturing nations. They outsource the clinical research (on T&M bodies model) to low-cost services nations. They outsource the marketing to sales and marketing firms.

So which is the entity which is winning and which is losing ? Manufacturing / services distinction is meaningless. What matters is which entity owns the intellectual property.

[Prem]

http://economictimes.indiatimes.com/new ... 157963.cms

'I think most would rather have India's problems than the West's'

NEW DELHI: India, staring at the slowest pace of economic expansion in a decade, can afford to lose a few percentage points of growth to greater public activism if the end result is better governance, says Anshu Jain, co-chief executive at Deutsche Bank.Jain, the first person of Indian descent to head a large European bank, told ET that India's mostly supply-side problems were any day preferable to the ones bedeviling the West as he exhorted policymakers to tackle the budget deficit, prevent a credit rating downgrade, and frame "stable and predictable" rules to attract overseas capital. "India is growing far slower than it could be for a variety of reasons related to politics and governance... But I think sacrificing some growth in the near term is a price worth paying for the higher level of public engagement and activism," he said in an exclusive 90-minute interview, his first globally since taking charge as Deutsche co-CEO last year.
I think most would rather have India's problems than the West's as it is far easier to solve these supply-side problems than overcome structural demand-side ones," said the alumnus of Delhi's Shri Ram College of Commerce.
Jain, who ran Europe's most successful investment bank that he built into a global bond trading powerhouse, praised the recent burst of reforms in India and noted that the country was at an inflection point and needed to avoid a ratings downgrade.

[svinayak]

These external advice from foriegn banks are really not for India and Indians

[Abhijeet]

Given the educational level of most Indians, it's impossible for outsourced services to employ a large percentage of the population. As a practical matter, most outsourcable services -- even low end BPO work -- come from a small set of English-speaking countries and require English knowledge that most Indians do not have. Other skills such as analytical and computer skills are even less common.

The idea that India can get rich by simply doing cool new age things like designing cars and solving problems over the Internet is laughable, and completely out of touch with the reality of the skill level that most Indians are at.

India needs lots of labour-intensive, low-skill work to lift the bottom up. Outsourced manufacturing is one good source of such work; internal infrastructure development is another. Construction is one that is actually working.

Otherwise the gap between the skilled and the unskilled is only going to widen. You will have people earning salaries comparable to or higher than the US Midwest in India, as they do now, while the large majority of people live in medieval conditions in fourth world looking cities.

In India currently, the top end of the income scale has risen to almost international levels, and there is an increasing number of people there. All well and good. But the bottom is still firmly where it was decades ago, and there are more people there (as a consequence of population growth), not less. We need more solid low-end jobs to employ those people, which in turn requires better governance and better infrastructure. Airy fairy fantasies about how Indians are magically going to get the skills to provide services to the entire world are really not helpful.

[Suraj]

Comparisons to Apple or Samsung outsourcing production to PRC while retaining design patents is not valid. Neither of them are just boutique IP shops. They are massive corporates with significant balance sheets and capital at their disposal, in addition to having a portfolio of design patents and IP. IP in itself is useless. Let me explain.

Assume a few guys in a desi nukkad came up with a revolutionary phone concept. Not only can it make calls, but when they carry it, their SHQ/GHQ becomes so beautiful looking that in comparison Katrina Kaif (or a model of your choice) looks like Mayawati. Further, when you carry the phone, your sh1t smells like Chanel #5 perfume. Scrapping together their life savings they patent the design of wowPhone(tm) and go to Shenzhen to talk to Mr.Wu of Wolfconn. He asks them how many they want to build. They say 5,000 is all they can afford now. He laughs at them and says minimum order 500,000 units. They propose a revenue sharing agreement where he gets 20% and they get 80% of earnings. He nods and they sign over the design IP to manufacturing. Weeks later they find the phone a wild success, but selling as wuPhone(tm) and no money being sent to them. They furiously storm into Mr.Wu's office and demand he stop, sell it as wowPhone, with 80% of profits to them as agreed. He tells them to **** off and that Indian patents don't apply in PRC. What do they do ? They have no money to fight with, and no leverage. They can take their design to discount ODM Hai Hai who cannot build the phone to the fine tolerance spec on the cheap, and their prototype wowPhones come out looking like something made in 1998 after a dog chewed it.

All these examples where firms hold IP are also cases where they're the big dog, with a huge base of capital and technological capability on hand, in addition to their IP portfolio. When Samsung makes phones, they make the chips and displays themselves. They commission Foxconn to get hold of a bunch of warm bodies to sit in a line and solder/glue things together into the latest Galaxy device. Ditto for Apple. Not only do they have the design IP, but the money and the clout to ensure that their latest iGadget gets built to spec, with costs of components and labour amortized by their ability to lock in supplies and sign a deal for Foxconn to produce millions of units.

In India's case, the problem with trying to organically develop such an organic innovation-oriented services driven economy is that a) we lack the capital to enforce our IP and b) we compete solely on wage arbitration in the process. Our imperative is to use our cheap labour to accrue capital and to get hold of technology by any means, fair or foul. Apple built their own stuff in their own plants and progressively grew into a CE behemoth who can dictate contractual terms to their ODM supplychain. Sammy still makes a lot of the critical stuff themselves, and use cheap Chinese labour to get around wage inflation in the developed economy that is South Korea today.

That is the problem with this talk about innovation driven service economy. In an ideal world you can come up with ideas, patent it and have some Chinese factory make it, and it all works out. In the real world, the guy with the $$ and/or leverage walks all over you, because you're the little boutique design firm who has no way to fight to enforce your IP outside the country. If the only leverage you have is wage arbitrage, you really have little or no leverage - you're trying to keep your billables low AND watch out for any competitor who can do the same service cheaper AND watch out for the fact that someone can take your design and give you the finger. Your input costs are high because you make nothing and have to import the equipment, and your earnings are constrained by having to compete on wage arbitrage.

The ability to design *and* build things within the country gives us economic leverage and power, by giving us not only the technological wherewithal, but the manufacturing base to turn those into reality in our hands. IP in itself is nothing - just a bunch of blueprints, formulae and whatnot. It's the $$ behind it that gives it worth. Having the design of a radical new howitzer is useless at wartime if you can't manufacture it -you might as well roll up the blueprints and shake it in the adversary's face, for that's all it is worth.

[Theo_Fidel]

^^^^
That is why I think Indian corporates focus so much on the Indian market and not the export market. They don't have to deal with all the patent and first mover issue when they try to export. If they want to expand internationally they just buy a company abroad rather than try to take India as the manufacturing base with them. If they knock off a gadget as 99% of China does and export it to the west the western company will pursue them to India and file court case after court case essentially bankrupting them. Without creating our own domestic IP and local technology we have no hope. But we do have Indian companies investing in design work in India.

As far a making widgets, we do that, but only for the Indian market.
---------------------------------

BTW I don't know if this has been posted earlier but interesting data points.

http://business-standard.com/india/news ... /201097/on

Industries offered employment to 7.8% more people in 2010-11, while real wages also rose 18%, an official data showed today.

According to Annual Survey of Industries (ASI), total persons engaged in different industries were 1.27 crore in 2010-11 as compared to 1.17 crore in 2009-10.

The data showed that wages in current prices (without adjusting for inflation) rose 24.8% over the period.

The data is significant since the 12th five year plan (2012-13 to 2016-17) showed that over 5 million jobs were lost during 2005-06 to 2009-10.

Tamil Nadu was the leading state in providing employment with 15.4% share, followed by Maharashtra at 13.4%, Andhra Pradesh at 10.3% and Gujarat at 10.1%.

According to the survey, in terms of emoluments or compensation to employees, 'basic metals' units have the highest share of 11.2% followed by machinery and equipment at 8.3% and motor vehicles and trailers at 8%.

In terms of payment to various factors of production, growth in rent declined to 12.6% in 2010-11 from 23.03% in 2009-10, while growth in interest paid went up sharply to 20.08% from 6.75%. Profit also expanded 19.55% against 10.36%.

The sample size of the survey was 61,573 which represent 27% of workforce in all the industries registered under Factories Act, 1948, and Bidi and Cigar Workers (Conditions & Employment) Act, 1966.

The number of factories grew by 8.38% to 2.11 lakh in 2010-11, higher than a growth of 2.29% the previous year, ASI data showed.

The highest numbers of factories were in ‘Food products’, which accounts for about 16.1% of the total factories followed by ‘Other non-metallic mineral products’ (11%) and ‘Textiles’ (8.8%). Among the states, highest number of factories was in Tamil Nadu at 17.4%, followed by Maharashtra (13.2%), Andhra Pradesh (12.4%), Gujarat (10.1%) and Uttar Pradesh (6.5%).

While capital improved its efficiency, others turned out to be less efficient.

The capital-output ratio, which is a measure of the capital required to produce one unit of net output (net value added), decreased marginally from 2.28 in 2009-10 to 2.26 in 2010-11. This means that less amount of capital is required to produce output and reflects efficiency in the economy.

On the other hand, output-input ratio declined to the lowest level in at least 10 years at 1.22 in 2010-11 against 1.23 in 2009-10, indicating that output requires more inputs. If juxtaposed with capital-output ratio, it means that factors other than capital--worker, land, etc-- were not as efficient.

There were 74 employees per factory, the same as previous year. On the other hand, workers per factory declined to 47 in 2010-11, the lowest since 2001-02, versus 58 workers in 2009-10.

According to the ASI data, the invested capital saw a growth of 23.88%, lower than 25.52% in 2009-10. Even fixed capital recorded a lower growth than last year, at 18.91% (lowest in three years), versus 28.05% in 2009-10.

The data showed that the output growth was at a four year high of 25.51% in 2010-11, versus a 14.06% growth in 2009-10. This reflects the lag effect of high investment in 2009-10.

After the slowdown in 2008-09 and the first half of 2009-10 due to the US banking crisis, industries recorded a 20.36% growth in their net value addition in 2010-11 compared to 12.19% in the previous year, an official data showed today. In 2008-09, the growth stood at 9.59%.

[subhamoy.das]

U still not getting the point.

We want the ODC ( off shore desing center ) of MNC to shift to INDIA and not their factories. Thats all.

We want Indian MNC to have the design centers in INDIA and factories in CHINA and BANGLADESH to MEXICO. That all.

We want INDIA to be the contract IP power house just like CHINA is the contract production power house.

[subhamoy.das]

Given the educational level of most Indians, it's impossible for outsourced services to employ a large percentage of the population. As a practical matter, most outsourcable services -- even low end BPO work -- come from a small set of English-speaking countries and require English knowledge that most Indians do not have. Other skills such as analytical and computer skills are even less common.

The idea that India can get rich by simply doing cool new age things like designing cars and solving problems over the Internet is laughable, and completely out of touch with the reality of the skill level that most Indians are at.

India needs lots of labour-intensive, low-skill work to lift the bottom up. Outsourced manufacturing is one good source of such work; internal infrastructure development is another. Construction is one that is actually working.

Otherwise the gap between the skilled and the unskilled is only going to widen. You will have people earning salaries comparable to or higher than the US Midwest in India, as they do now, while the large majority of people live in medieval conditions in fourth world looking cities.

In India currently, the top end of the income scale has risen to almost international levels, and there is an increasing number of people there. All well and good. But the bottom is still firmly where it was decades ago, and there are more people there (as a consequence of population growth), not less. We need more solid low-end jobs to employ those people, which in turn requires better governance and better infrastructure. Airy fairy fantasies about how Indians are magically going to get the skills to provide services to the entire world are really not helpful.

If I may just remind u that it is these "good for nothing INDIA gradudates" who are firing up the GSLV, making the TEJAS take a spin, having the Arihant do a deep dive in the sea and yes fire 1000k missiles from below the sea, putting out super comps like PARAM, discovering water on moon, writing the latest products for MS, GOOGLE etc, making cars which can be launced in Australia, performing complex medcail surgeries, intercepting an incoming ballistic missile, giving us USD 100b software industry, making the fast breeder reactor go critical, building the KOLKATA class destroyers, having the largest refinery in the world, building huge factories in the gulf ... list goes one AND the best part SEND 70b ( highest in the world ) home by selling their SKILL to the whole world. AND U SAY THERE IS NO TAKER FOR THE INDIAN SKILL!

Yes the low skilled need jobs - but i would argue that a job in a desing office as a security guard or a car driver or a receptionsit or a data entry operator will work better than that job on the shop floor of a factory and how many factories will u put and where will u put in INDIA - there is simply no land but yes u can put up a 100 story desing centre easily in a trier II city.


Please open your mind to the beautiful INDIAN MIND which works when it is challenged.

[subhamoy.das]

I have to bring in CHINA again as it is being held up by many posters here as role model of produciton driven job creation economy. See below

============
For college graduates, the top three industries were the financial, real estate, and IT industries, and the highest average starting salary was 2,520 yuan a month. For fresh graduates with a master's degree or a doctorate, the top three industries were the IT, knowledge-intensive services and real estate industries, and the highest average starting monthly salary was 4,087 yuan and 6,564 yuan respectively.
=============

[Suraj]

We want the ODC ( off shore desing center ) of MNC to shift to INDIA and not their factories. Thats all.

Do you understand how an MNC works ? This is not going to change anything. Take GE's design center in Bangalore. The IP created there belongs to them. The ownership of the creations is GE's. The margins on the production goes to GE USA. All the Indian workers have is the fact that they do the work cheaper - wage arbitrage. GE owes no loyalty to India - if they can find cheaper grunts elsewhere, they leave. Even if we tried to poach their employees to work in industries of value in India using the knowledge gained from GE, it doesn't help us unless we can manufacture the things they designed.

We want Indian MNC to have the design centers in INDIA and factories in CHINA and BANGLADESH to MEXICO. That all.

Name an Indian MNC that got to where it is without being a manufacturer first ? Tata ? Nope, began as Tata Steel. Reliance ? Nope. Oil, textiles, synthetics. Bajaj ? Automobiles. Pure play financial and retail services entities (e.g. ICICI or even a store chain) only began to establish themselves in the last couple of decades once people started having money in hand - and that money is created by producing things of value. Even these conglomerates started getting into non-manufacturing areas (e.g. grocery, finance, insurance) because they have the substantial balance sheets and credibility as large entities no different from chaebols in Korea.

Worldwide, financial/insurance and retail MNCs are recent phenomenons riding upon the wealth created by more than a century of manufacturing. *Every* other MNC, existing and defunct, started out as a manufacturer.

The Chinese may not be getting wildly rich from the mythical Apple Foxconn production line, but they *are* getting rich by actively stealing technology from all the companies willing to manufacture there, and building things themselves. Their system requires companies to invest in China as joint ventures and stipulates demands on transfer of technology to the local partner, while actively curtailing legal enforcement of western IP in China and shielding their local entities from western litigation.

[Abhijeet]

I'm a little surprised that subhamoy.das's emotion-over-thought ramblings are being taken so seriously over multiple pages here. Many other people probably have some variant of these ideas without being able to articulate them, so patient public refutation is probably a good thing.

================

Anyway. Theoretically, it's possible for a country to supply only high end services while importing everything else. Comparative advantage says nothing about primary or secondary or tertiary sectors. If everyone in India was a highly trained doctor or software engineer, then we could simply provide remote medical care and deliver SaaS apps over the Interwebs, import everything else, and still have a high per capita GDP by charging handsomely for these specialized services. Unfortunately, in the real world, not everyone is going to be a highly trained doctor or engineer, India lacks even a good elementary education system, and we have no sustainable comparative advantage in services. Our temporary comparative advantages are low wages and English knowledge, and both of these advantages are narrow and being eroded continuously.

Unfortunately, there is no shortcut to development other than good governance and institution building.

[subhamoy.das]

In one post u said "who care about IP". Now u say "IP is the most valuable thing". It is about jobs and not about IP. U are completely missing the point again. it is about jobs. And how does it matter if we manufacture their engine more than if we design them. It is still a cost arbitage job, one which requires more skill than the other. The production job will move if they find a cheaper place to produce just as design job will move if they find a cheaper place to design. The design move needs higher skill and hence more difficult to find where as produciton move can happen to a wider number of coutries who can provide low level skills. So a car production unit can move to Bangadesh or Indonesia but the desing unit will remain in INDIA.

If countries have created wealth doing manufacturing and exporting it for centuries, good for them. Now they need minds to sharpen it and we in INDIA can offer that because we have the minds who have desinged and built simiar things locally for local consumption and hence have already moved up the value chain and now ready to export service. So we will create jobs by exporting service. If gulf contries can create jobs by exporing natural resource, some countries can create jobs by exporting financial services, some countries can create jobs by exporing trading service, some countries can create jobs by exporting toursim service then WHY NOT INDIA create jobs by expoting manufactuting, IT and hospitality SERVICE.

Again it is not about getting rich. It is about creating jobs. The CHINESE may be stealing but are they able to export and hence create well paying jobs - I doubt from the figures I am seeing.

[member_20292]

Please open your mind to the beautiful INDIAN MIND which works when it is challenged.

Truer words ne'er were spoken Mr Das.

There are a few exceptions which include people around these parts. You may know some of them pretty personally, closely as well.

[member_20292]

How should our companies beat them, Suraj ji?

How does a Tata compete with , say a Bao steel. I want to see that happen. Indian companies ruling the world, at least in a few categories.

[Suraj]

Highly skilled and innovative employees require years of education to get to that level of capability, which the economy has to invest in. This requires the economy to have the resources to educate them. For the economy to have such resources, it has to produce things of value.

Abhijeet: the meme about India transitioning from a pre-industrial to post-industrial services driven society without the stop in between was probably popularized by Thomas Friedman's droll 'The World is Flat' tome. An entertaining but superficial read.

[subhamoy.das]

I'm a little surprised that subhamoy.das's emotion-over-thought ramblings are being taken so seriously over multiple pages here. Many other people probably have some variant of these ideas without being able to articulate them, so patient public refutation is probably a good thing.

================

Anyway. Theoretically, it's possible for a country to supply only high end services while importing everything else. Comparative advantage says nothing about primary or secondary or tertiary sectors. If everyone in India was a highly trained doctor or software engineer, then we could simply provide remote medical care and deliver SaaS apps over the Interwebs, import everything else, and still have a high per capita GDP by charging handsomely for these specialized services. Unfortunately, in the real world, not everyone is going to be a highly trained doctor or engineer, India lacks even a good elementary education system, and we have no sustainable comparative advantage in services. Our temporary comparative advantages are low wages and English knowledge, and both of these advantages are narrow and being eroded continuously.

Unfortunately, there is no shortcut to development other than good governance and institution building.

If information high way is a real thing so can information or knowledge economy be. India's charter is to become a knowledge or information economy visa ve a production economy. Jobs will be knowledge and information jobs than production jobs. Knowledge knows no language boundaries and just like anything else it is cost sensitive when traded. If tomorrow there is another country with same level of knowledge but cheaper price, knowledge jobs will move there. You donot make 100b just by hawking english and low cost - come on give some credit to knowledge of these poor folks. You donot need super duper sw engineers of doctors to turn into a knowledg economy, u need lots of them and in some basic quality,motivation, constant skill upgrade and a low cost.

At least u did not say development takes tons of factories because there is no space for them in India as there is no land and u know factories cannot be build 100 story long - so this factory driven model is not going to work for jobs here. we have this knowledge based economy to cater for jobs . What is your solution to jobs for Indian youth? This raging debate is about this only

[Prem]

Novel Energy Storage to Chill Milk in Rural India
http://www.technologyreview.com/view/51 ... ral-india/

Most people think of a battery as a device that stores electrical energy. Startup Promethean Power has developed what it calls a thermal battery that will first be used to cool milk in Indian villages.Promethean Power has signed a contract to supply 50 of its milk chillers to Hatsun, India’s largest privately owned milk processor, the company’s two founders said this week. The company has also raised money, less than a million dollars from First Light Accelerator, for a joint venture called Promethean Spenta Technologies to make the chillers in India.It’s a step forward for the Promethean Power, which was founded by two Boston-area social entrepreneurs over five years ago. The founders—Sorin Grama and Sam White—have endured many travails, both on the technology and business side, in an effort to create a cost-effective product for India.Its thermal battery is a cylinder-shaped tank with a phase-change material inside. Milk is poured over the cylinder when the material, which stays liquid to 27 degrees Fahrenheit, is cold and quickly cools the milk. Because the cold energy is effectively stored in the cylinder, the chiller can work for hours without grid electricity or a diesel generator.When electricity is working, the chiller circulates another fluid around the battery to lower the temperature. That fluid is pumped through a separate device, a compressor loop which extracts the heat and lowers the temperature of the circulating fluid. One of the biggest engineering challenges is making the chiller smaller to bring down the cost of materials, White told me before moving to India to help oversee product testing.

[Suraj]

How should our companies beat them, Suraj ji?

How does a Tata compete with , say a Bao steel. I want to see that happen. Indian companies ruling the world, at least in a few categories.

What competitive issues does Tata Steel face vs Baosteel ?

[gakakkad]

"knowledge based" /"information based" economy is a buzzword onlee... 99.9% of amreeki mango public is doing mango job onlee.. like selling cars,farming,selling real estate ,operating machinery in a factory ,repairing HVACs ,plumbing etc..just like anywhere else in the world....they are not designing anything..

any economy will need plenty of jobs of the above sort to employ the masses ..

[SriKumar]

Suraj mian,
when you do produce your first wowPhone (tm), this phata abdul is first in line for the hand-set (for the KK/Mti feature)....that para should have gone into the humor thread.

subhamoy.das,
I think a part of the issue as I see it, is one needs to define exactly what one means by knowledge jobs (or information jobs). General opinion holds that IT jobs alone are knowledge jobs. In my opinion, this is incorrect. Jobs on production floor are also knowledge jobs. Jobs existing in the pre-computer era are also knowledge jobs (atleast some of them). A Ph.d in metallurgy experimenting in a lab to get a better alloy is a knowledge job. Running CNC machines, product planning, process planning of a factory etc. all require training and knowledge. I think you are stereo-typing a factory job as a worker who mindlessly assembles stuff. I dont know the figures but there are a lot of engineers employed in factories (surely a knowledge job) and routine-motion jobs are being replaced by robots. If 70% of Indian economy should be a knowledge job, please define 'knowledge job' and provide some examples of categories (IT being the obvious one).

Finally, I could not fully gather your position but I think you are trying to see what is the best recipe for maximizing job growth in India. If one is trying to think on a country-wide scale, it is not wise to pick one box in a supply chain (and I include design in the supply chain) and say- this is where I will focus. That leaves the country's development distorted and very vulnerable to disruption. One has to look at everything starting from raw material (if it is a physical product), design, manufacture, distribution to markets (which ultimately pays you for the service/product). As Suraj mentioned, there is a major debate going on in the US about bringing back manufacturing back into the country. I would say that one needs to take a holistic look at what a country needs in order to be self-reliant and self-sustaining, and with a type of development touches most of the population; and then extrapolate from there. This, to my mind, would involve owning more of the full process and not just a few areas that are computer-related. There is no doubt that IT (coding, database mgmt, networks etc.) has provided a quick, and unprecedented boost to the economy but there are some basics in the economy that need attention, in spite of the bright sheen in other areas. However, most would agree that high-tech industry is a good thing to have (chips manufacture, automotive and aerospace). At some point (and I think it now), attention has to be paid to develop these as well. If this means bringing in low-tech factories followed by high-tech factories, it should happen.

[Theo_Fidel]

I did not have the heart to bring this up earlier, but if you think that unskilled abdul can work in a modern factory, you are going to have to rethink your strategy. Even Foxconn Chennai only accepts High school graduates at a minimum, prefer 2-3 years of a skilled trade or work experience. Nokia Chennai IIRC is 1/3 engineers on the production floor. All those auto companies only hire graduates these days. Unskilled are only brought in for security, transport, barber shop, etc.

All those who wonder why Chennai continues to be the place of choice, despite infrastructure issues, need look no further than the supply of engineers and graduates. No other area in India even comes close.

Sometime earlier I had mentioned that Hyundai Chennai using 20,000 employees generates more wealth than the whole of the Tirupur, this is exactly what I meant. For the level of investment the Hyundai factory generates an incredible surplus of wages, cash and ancillaries that puts wealth in peoples pockets to distribute to others. You are not going to generate that type of wealth with 5th standard fail types. A 100,000 5th standard fail types working in factories can never hope to generate the wealth a single Hyundai does.

Within Hyundai Chennai, the actual production level labor is only about 5,000 or so. All the rest are in sales, marketing, testing, QC, software, equipment repair, install, etc. To my mind all these are service jobs, not suited to 5th standard fail types. At best the unskilled can drive a couple of screws to hold the mirror assembly to the car but the majority of work is very highly skilled.

I have said this before, 5th standard fail types in India are doomed. There is no future for them, and I'm not sure what can be done. They are only good for brutal construction work, brick kiln work and working out in fields. To think that modern manufacturing can provide them jobs is to completely misunderstand the level Indian manufacturing is at right now. At least in Chennai most medium to large manufacturing is bench marked to the world, ISO9000 and all. Even Engineering degree types struggle to keep up. We expect our software to be written by 25 year educated highly skilled types yet we expect our cars and condensed milk to be made by unwashed abdul. What gives, we need to hold manufacturing to the same standards as IT and expect similar types of folks to work there.

Our only hope is to target high skill levels and generate a flood of skilled service employees so their surplus is enough to feed the rest of the nation. This business of trying to find PSU style manufacturing jobs for 5th standard fails has to stop. Our manufacturing has to be world class not dumbed down so some nanha from triupur can do it.