Sunday, November 05, 2006

Looking ahead on the Indian economy

Macroeconomic Premise : "Globalization" happens when countires choose to dismantle or at least reduce economic barriers
amongst themselves. This naturally leads to a "Free Flow" of trade, manufacturing, services, manpower, investment funds all
at varying degrees depending on how the respective governments design their policies.

Microeconomic Premise : Companies are constantly competing to increase revenues ( topline ) and reduce costs ( bottomline ).

Globalization is giving them options to reduce costs like never before.
The above 2 premises in very simplistic terms explain the Global Economic trends we are witnessing. What does this mean for us in India ?

1) In the next 15 years Asia's total share of the global economic pie will move up from current 35% to above 45%. No prizes
for guessing which 2 economies will drive this. While China & India will grow at scorching rates touching 10% compounded, the
US will trudge along at about 3%.

2) The workforce is becoming increasingly Global as "geographic" boundaries fade away ... driven by economic realities and
technology advances. ( In P&G I see increasing numbers of "location-independent" assignments ! ). India by 2020 will
contribute another 150 million skilled personnel to the "global workforce" ( US will contribute only 15 million ). My
personal theory is that the only jobs which will continue to he "location-specific" are the ones which need company interface
with its customers since its hard to replicate personal relationships and interactions. The rest of the jobs need to move to
whichever location gives cost-advantages.

3) Per Capita Income from today's $750 is projected to hit $3500. Just imagine what this means in PPP terms. This is natural
as there is a "work shift" from developed economies to India / China. There will be an "averaging" out of salaries globally.
While salaries in developing markets will see continual increases ... the salaries in the developed markets will see a
gradual decrease ( if the jobs are not directly shifted ).

4) Looking at the big 4 developing countries ( BRIC : Brazil, Russia, India, China ) Brazil is already stagnating since its
not really "low-cost" anymore. Mexico which earlier provided a "low-cost" manufacturing option to savvy US companies is now
losing out to China. In this "free flow" India and China need to be very careful lest some other country hijacks the "cost
advantage" situation like what has happened to Brazil & Mexico. I see this as a relatively low risk given the scale of these
countries and the huge gap in present disparities.

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