India – high cost economy?

Growing political mayhem and economic mismanagement are turning India into a High Cost Economy. Read that as falling competitiveness, job losses and industrial emigration.

On September 12th, 2005, Business week headline read : “Why the world must watch out for India and China”. Alas, this very statement created in India a superego that is now hard to get rid of.  We are proud people. A little bit of praise thrown at us goes a long way in making a permanent mark on us. But to what avail?

The IT boom in India after the end of the Y2K scare, created innumerable opportunities for professionals in the IT industry. People from all kinds of specializations began flocking to the IT job sector. The trend continued with the result that Bangalore was nicknamed the Indian Silicon Valley… Unfortunately the dream has ended but we oursleves are late to realize it. Earlier companies abroad used to outsource their service(s) to India, because the labor here was cheaper. Now the scenario is entirely different. The skilled labor in India is being exploited by their very own country, in terms of poor working conditions, poor health/medical infrastructure, less than average wages… The multinationals, on the other hand, have had it with the “cheap” indian labor. Giants like Nokia and Dell have shut down their captive BPO units, as they say that “the HR costs in India are too high…”

Considering that India was labelled the intellectual capital of the world, and the image that Indians already have in mind – of the West not being so “intelligent” as Indians, a recent statement by the CEO of a London based real estate company, Axiom Estates “We found that for the price, the skill level wasn’t that good in India” could come as a surprise to many. But even if that is a surprise, many of us would just shrug off the thought that today Indians stand challenged in intellect and skill. A partner at the consulting giant Ernst & Young, says “Labour in India, is far more inefficient than labour in any developed nation”. Developed Nation. Is India a developed nation? No. US? Yes. Does that mean that the labour in US are not only as intelligent but also more skilled than Indians are?

The Global Competitive Index (GCI): GCI Report 2007-2008

The GCI is computed by assessing different aspects of a country. The facilities it provides, the infrastructure, the projected future growth etc.

Basically the Rank computed on the GCI is a break up of the following factors:

Category A: Basic Requirements: Institutions, Infrastructure, Macroeconomic Stability, Health and Primary Education.

Category B: Efficiency Enhancers: Higher Education and Training, Goods Market Efficiency, Labor Market Efficiency, Financial Market Sophistication, Technological Readiness, Market Size.

Category C: Innovation and sophistication factor: Business Sophistication, Innovation.

It would generate huge data here to compare all the countries on the basis of all these factors, so if you are interested in the entire report, here it is : GCI Report 2007-2008

However, it would not be fair to directly compare India to the more develped countries like US or Norway. Putting things into perspective we should narrow down our list to ten countries that have had a past similar to India. Hmm. Lets see.

China is definitely in. It has had a violent history and trade routes of the Chinese with the Indians were established long ago.

Japan is in, which in my personal opinion was far worse off than India, after the Hiroshima Bombing.

Australia got its independence fairly late, and again, was far worse off, just because at the time of their Independence they did not even have any proper government. Simply because Australia was treated as a haven for criminals of the British domination.

Singapore is in. It is a very small country with similar or even lesser resources than that in India. Moreover, it generates majority of its revenue the way India does – tourism.

We should leave the European nations and the US and Canada out of direct comparison with India.

So we have a healthy mix of India, Singapore, China, Japan and Australia. Look at the following table:

GCI 2007-2008 Rank

A comparison of GCI rankings of similar economies

Note: Many people would blame just about everything in India on Population. Comparing equivalent data: China has a poplulation of 1,323,324,000. India on the other hand has a population of 1,103,371,000. India however has a population density 3 times that of China. Again, this is not very representative data, considering that some vast areas both in China and India are uninhabitable. But before we blame everything on population, population and population, we should give due consideration to other comparable factors as well.

India:

It is a SHAME that after majority of the infrastructure being developed by the British in India, we have failed to maintain the same after 1947, giving us a rank of 67. Something to be really really ashamed of.

For people who have population as an excuse, China, it seems, with 220 million more people roaming its lands, gives its people better healthcare and education than India does.”Health and Primary Education” rank for China is 61, and India is 101, there is something drastically wrong with India.

Macroeconomic Stability: India 108, China 7. I don’t even know what to say of the difference here. The performance, structure and behaviour of Indian economics, it seems, is *very* difficult to understand. With such qualified and capable economists in India, what exactly does that mean?

The “goods market efficiency” and “labour market efficiency” comparisons show that we are ready to purchase goods and spend but not ready to work to earn.

India surpasses China in terms of Higher Education, Technological Readiness, Financial sophistication etc. But had we only been competing with China this would be a nice thing, even though there are hardly any Indian technical institutions that rank anywhere on a global scale. Also the stock exchange in Shanghai came into force in 1990 as compared to BSE which was formed in 1875 and is the oldest stock exchange in Asia !!

The economy:

Rentals of land per square feet are highest in the world in India. Mumbai (5900 INR), London (5100 INR), Delhi (3900 INR), Dubai (2900 INR). So apparently Mumbai provides a better lifestyle than London and Delhi better than Dubai !!

A look at the tax rates baffles me as to where exactly the tax-payers’ money is going?

Canada has a higher tax rate than that of India, UK lower. Both these countries give their citizens free healthcare. Go figure.

The mother of all mismanagement in India is the antedeluvian structure of laws that we are following.

We are still following the pre-Independence laws laid down at a time which when viewed today is pre-historic. The land laws in India are regulated by the state and the center has no control over it. Land acquisition delays hurt major players who ultimately give up and take their business elsewhere. Posco India, a steel giant put forth an acquisiton to erect a steel plant in Orissa, with and FDI of USD 13 Billion (!!!), in 2005, and in 2008, three years later it is a victim of State-Center politics over land acquisition, and is yet to acquire the land. A Mckinsey representative says “Real estate costs in India are so much out of sync with global rates that it is impossible to do business in India.”

Lack of infrastructure in India causes delays on a grand scale. (The tortoise in the Tortoise-Hare story would be proud). Globally trucks travel around 1200 Kms a day, while in India the average is 400. Thanks to poor road conditions, potholes, traffic jams, lack of automation at check points, toll booth pangs and erratic traffic patterns. A representative of The Transport Corporation of India puts it painfully as “Each state in India is a different country, requiring different laws…” Sea transport is expensive as well. Mooring a vessel in India is 50% more expensive than at Singapore. Handling cost of a container in USA is $6 while in India is $48 !! Power in the US is around INR 3 per unit, in India is around 7 per unit, with erratic power failures. The cost of running a generator set in India is around INR 18. Where is the money going?

Worn out, useless laws without meaning, have dire implications. In the shipping sector, tax laws are so cumbersome that more than half of the Indian ships are being registered at foreign ports. This also sidesteps the “law” that any Indian registered vessel must have Indian crew.

On being faced with a sudden rise in an inflation hit economy, the statement given by the joint secretary at the Ministry of Commerce in India “Costs are increasing. It’s the law of economics. So be it” might not be very encouraging. However the government must realize that they are building an expensive nation and a costly economy does not sustain itself for long. If the IT boom can translate to IT slump in less than 4 years, economic boom can metamorphosize into an economic depression as well.

Finally it just boils down to “The government should…” in India. Any topic. You name it.