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For long, India was compared to China and suddenly with Chinese meltdown, India started to look much better. Despite logjams in parliament, India with its stable political regime, large domestic market, Indian multi-nationals and pipeline of foreign investments in manufacturing and services, seems much better than other BRIC economies that are plagued with some or a mix of factors such as high debt, poor infra-structure, political uncertainty or a bureaucratic regime that makes Indian bureaucracy look pink. .

Mr. Narendra Modi, instead of resting on weak Dollar prices, an economy that managed to move forward despite poor rains, needs to watch out for red flags.

Prone to bubbles
The Indian economy has been growing at a pretty decent rate with real GDP growth at around 7%. Most of this growth has come from growth of Services Sector. In 2014-15, the share of services sector was 52% in GDP and of this 20% came from real estate industry, financial services and professional services.
The growth in services sector comes primarily from abundance of cheap, skilled manpower that can speak English. The two stated drivers for growth have been 1) Development of technology that made outsourcing work to offshore centres easier and 2) the cost differential between labour costs in India and those in US and Europe. An unstated driver has been excessive liquidity in the West with very limited investment options especially in debt leading the investors to look at emerging economies. India has been able to attract most of this money not because it was the best but because it appeared to be less risky than other economies. It attracts liquidity from investors in US and other countries for investment.

As a consequence, India economy has been prone to asset bubbles. Two of the major ones are

1. Real Estate – The bubble is about to burst as indicated by the suicide committed by the Thane builder due to excessive debt. His struggle is a struggle faced across the industry, be it large, medium or small real estate developers or builders. The suicide is reflective of high risk in developing a property, especially getting bureaucratic clearances, and of poor returns. The rental income is around 3% of investment with little or no possibilities of capital appreciation in medium term due to high inventory levels. There are very limited chances of price appreciation in the next couple of years. Fuelled on low income rates and booming salaries, real estate had become the only investment option for lot of people.

The returns in real estate sector excluding cash components in the transactions may in some cases be poorer than other financial instruments such as equity. Please see the illustration below.


The government and RBI failed to read the signals and did nothing to cool it down. The sector is one of the biggest contributors to low sentiments in the economy. A softening of prices will help the other sectors in reducing their costs and help them revive it while the investment sentiment continues to be low. The challenge for the government is how to soften the blow and reduce prices.

2. Another bubble being built up in the economy is e-commerce. The driver again is global liquidity and lack of investment options. Most of the ecommerce ventures have been around for atleast 5 years and are running into losses. Despite this they continue to attract venture funds. Interestingly most of these venture funds have a stated policy of not funding ventures that do not achieve operational viability within the first two years of operations.

“Make in India” is not happening
Post World War and till 2008, it was US Economy that led recovery after global crisis. Part of it came from propensity to consume by US consumers but it was also because of the technical leadership of the USA companies. USA was the biggest spender in research till it was pipped by China couple of years back. This investment in research led to US companies becoming technical leaders on one hand and sought after brands on the other hand.

Compare it with India. Per thousand persons, India has less number of researchers than Kenya has. India’s spend on R&D is only 0.9% of GDP compared to 2.7% by USA, 2.08% by China and 4.36% by South Korea.

Another big symptom of skew in Indian economy is hiring pattern in Indian Engineering colleges. Of the class strength, 50% end up in coding, 35% pursue MBA or take a job with consulting companies and financial services companies basically as analysts. Only 10-15% engineering students pursue Engineering and take up either Engineering jobs or pursue post graduate studies in Engineering. The bulk of the engineering jobs still come from production and operations and not research and development. Most Engineering students from good colleges who want to pursue higher studies and want a career in research and development go abroad mainly to US for their MS. The brain drain still continues in India.

In Mr. Narendra Modi’s Gujarat, Doctorate graduates were provided ad-hoc jobs in teaching institutions at Rs. 5,000 per month killing any incentive for a student to opt for higher studies and a career in research.

“Problem of plenty and poor work culture”
India also faces problem of plenty. It has a huge population. This coupled with the lack of resources and gross mismanagement of resources limit India’s options for growth. The poor work culture including the culture of bribe permeates all sectors. For example, in auto industry, most quality control personnel are on cash retainership of vendors. The government is poor but the politician s who are meant to provide good governance are not. It’s a known fact that one of the major drivers for growth of real estate industry were politicians who used it to invest their ill-gotten wealth.
With increasing automation in software industry and replacement of manual labour with electrical gadgets, the country faces grave risk of growing economy with reduction in jobs. The low end jobs will be eliminated. Till now, India was able to work well as our population ensured that we had overqualified people in most of the jobs especially at the entrance level. Engineers replaced Diploma graduates on the shop floor just as MBAs replaced graduates in sales and other jobs. The problem of plenty with poor remuneration rates also meant that most of the graduates being produced in India cannot match skill sets of graduates in western world. The shrinkage in low level jobs will create serious problem for India and worsen economic sentiment. Given the hiring pattern at the engineering institutes, elimination of even 5% of entry level jobs in Software industry will create serious problems.

The country is also producing lot of graduates. The economy would have to maintain its growth to continuously absorb them and create jobs that can meet with their aspirations. Besides these, India also produces lot of unskilled and semi-skilled labour. With automation the low end jobs will be under pressure and reduce creating a mismatch in demand and supply. Already Government has been forced to initiate MNERGA to provide employment to rural poor. But the crisis will only grow in India with rising population.

The agenda for Mr. Jaitley is very clearly defined. The last decade and half as led to rise in living standards in urban areas. This has led to rise in aspiration levels across social classes and strata. This life style and aspirations can be only fulfilled if the Government can mobilise private and public investments in creating new jobs. For India to attract foreign capital it also needs to build physical infrastructure that increases efficiency, reduces costs and social infrastructure that is sustainable. Growth without jobs is not sustainable. A possible solution could be a MNERGA kind of scheme to develop physical infrastructure.

The government can also avoid automation if it can change the work culture of the country. Take for example, at home, machines and gadgets like washing machines are replacing manual labour and increasing fuel consumption. India needs to harness its human energy and reduce its dependence on energy from non-renewable resources. India needs to invest in research and development to create intellectual property and give its industry a cutting edge over others. It has to invest and fund research in colleges and encourage industry to invest in it so that we can develop competitive edge over China and US.