-- Posted Thursday, 10 August 2006 | Digg This Article
Shailendra Kakani
www.commodityresearch.in
10th August 2006
Although the international goldbug community criticizes the handling of American economy, I feel we are somewhat unjustified in fixing all the blame on the American financial managers. Not because they are not to be blamed, but simply because they are not the only ones to be blamed. The fact is that almost every government in the world has mismanaged its economy. Here I will speak of India, because I live in the country, so I have a closer look at the mismanagement.
India in the international press has been getting rave reviews of late. There was a time whenever international journalists wrote about India it was confined to snakes, sadhus, holy men, dust, heat, and bride burning. It was the country where people had no food, where girls were killed in their infancy to save the dowry, and where children were sold because their parents had no money to feed them.
During last five years this has changed, which is kind of surprising, since all these things are happening even today - though on a lesser magnitude, thank god. Today foreign journalists sing an entirely different tune: that of India having "arrived." They glorify India for its software proficiency, for its role in stealing the jobs of Western clerks and service professionals, and for being an Asian tiger.
Nothing can be far from the truth. It is true that India has achieved some success in software industry, it is true that the country generates hundreds of thousands of code writers and programmers, the fact is the all the software exports from the country even today amount to nothing more than one per cent of the global IT industry turnover.
Indian BPO companies employ almost half a million people today, but none of them have a guaranteed job. Their jobs depend on the wish of the US companies and the politicians. In every western country there has been some political backlash against the job outsourcing to India, even though, according to a report of Mckinsey , for every dollar of work outsourced to India, the US gains $1.12-$1.14.
John Kerry, the Democratic candidate in the US elections had made a lot of hue and cry about it, and other politicians have done the same in other countries. They are not to be blamed; the general population itself is not happy. Many Europeans and Americans abuse Indian call center workers on the telephone. Many say "I don't want to talk to you, pass me to someone who can speak my language."
According to a report published recently, the BPO industry analysts have seen the phenomenon of "racist" clients grow in recent years, as customers in the UK and the US become increasingly sensitive to the political issue of jobs outsourced to India. "Workers face a spectrum of rudeness -- from sexual harassment to fury at unsolicited sales calls, to "open racism", the report said.
"Some workers are deeply hurt by this abuse." The report further mentioned. "The issue of xenophobia cannot be resolved from India-end: there must be a battle against it in the countries responsible."
There can only be one end to this problem: let it last while it last. Sooner or later, the US/Western companies may cut down on outsourcing work to India either due to economic considerations or due to rising political pressure. And when that happens, India will be soaked in a sea of tears. After all those Americans/Europeans who have lost their jobs to Indians still have their social security, can still move around in minivans, and can still afford deluxe health treatment. No sacked Indian worker will have such privileges.
And this is the industry on which entire Indian economy is pinning its hope.
Coming to the mismanagement of the economy, the gold bugs complain about budget and trade deficits in the US. They talk of US trade deficit with China alone reaching beyond $200 billion; they talk of how these days it takes five dollars of debt to create one dollar of growth. All of this is true, but let me tell them what Indian politicians and economists have done in this glorious land of Vedas and holy rivers. Recent official data showed the country's deficit for April and May stood at 777.40 billion during the first quarter of 2006-07, accounting for 52.30 per cent of the projected figure of Rs 1486.86 billion for the entire fiscal.
Of course like his US counterparts, the Indian Finance Minister is unfazed. "We should be able to be within our target," Chidambaram said when asked if huge spending plans threatened government finances. "It is good that spending is happening. We are not unhappy about it. Increased spending will mean more money in the system," Chidambaram said, even as the international rating agencies and multilateral institutions cite India's large fiscal deficit as a barrier to sought after double-digit economic growth.
Just as in the US the politicians don't wish to confront the population by telling people in their face that they are living beyond their means and need to curtail their spending, the politicians in India don't wish to tell the people to reduce their oil consumption. Neither do they increase the prices, fearing the backlash of opposition parties and a loss of votes during the elections. So the government goes on selling petrol and diesel at much cheaper price even as the international crude price goes on rising.
Yet another parallel. Budget deficits are a fact of life, virtually in every country where the politicians are either corrupt or inefficient, often both, as is the case in India. The risk here in India however is that the borrowed funds are used for non-priority and unproductive expenditure. More money is spent on doling out compensation to the relatives of the dead people in a train accident than is spent on improving the infrastructure so that accidents could be minimized or avoided. Such expenditure, goes without saying, only fuels inflation and reduces funds for critical public investment.
Peter Schiff accuses the US government of camouflaging the inflation figures. He has been tirelessly highlighting how the government has been fiddling with the core CPI basket, and how it has been hedonically adjusting the prices and transforming a 5% increase into a 3% decrease based on a subjective assessment of quality improvement. My word, if Peter was observing Indian politics and governance closely, his attack would be even more scathing.
In India the government doesn't even show the true deficit in the budget. According to an article by A Rangachari, "the budget is insulated from the effects of oil price increases by issuing special oil bonds to the oil companies to cover partly under recoveries of cooking gas and kerosene subsidies payable by the Government (Rs 73,500 crore in 2006-07 and Rs 40,000 crore in 2005-06) and these are not shown as expenditure in the budget ."
The gold bugs often joke about comments of the US Finance Secretary or the Fed Chairman, poking fun at their inane comments; all I can say is they ain't seen anything yet. They ought to listen Indian politicians on a daily basis if they wish to have the best of financial buffoonery. Take for example the present Finance Minister; though he is worshipped by the media here and abroad, he keeps coming out with statements which only can result from a serious foot in the mouth disease. During May 2006 when gold was on its path to scale glorious heights, this FM had a string of meetings with officials to find out if international gold price was going up because of hoarding by Indians.
Even a child knows that Indians can't hoard that much gold to influence the international price. Even an Economics junior understands that India, even though the largest buyer of gold in the world, is basically a "price taker" and not a "price maker".
Recently the same FM urged various sectors of business and industry to replicate the success achieved in the information technology industry - without realizing that Indian success in IT was a matter of luck, simply because when the boom came two decades back, Indians were the only people who spoke English and were willing to work at a tenth of the salary given to an American programmer. More luck came their way when the Y2K scare pushed more and more work to Indian shores.
Fortune doesn't favour every time, and such a success is impossible to replicate in other fields. In fact India is not even likely to keep its software advantage beyond another decade. As more and more countries gear up their younger lot is catching up fast with Indians. China is doing everything to beat India at its own game. Millions of people are learning English in China , thousands of students are coming to India to study software technology, and dozens of Indian companies are setting up shop in China to teach them everything about IT and ITES. Reason enough why recently the doyen of Indian software industry Narayan Murthy predicted that China could catch up with India in the IT industry in five years. "I do think China is running very fast to catch up with India. Chinese are much more determined than we are. And already we are seeing visible signs of progress by China in our industry."
His own company, Infosys, has major plans to expand operations in China. It is right now using China as a development centre for their global clients. In phase-II, they will enhance our focus on the market opportunity in China from multinational companies. In phase-III, they will focus on the Chinese companies. As anybody can understand, by the time all these phases phase out, the doughty Chinese would have seized the software advantage.
While I don't wish to approve of the actions of Bush, Bernanke & Co., I wish to highlight the fact that most of the governments are mismanaging their finances and playing with the future of their populations. No doubt Bush, Bernanke & Co. are to be blamed but let us not spare other charlatans either.
Meanwhile, the presence of so many bogeymen simply means extra bullish factors for gold. When people around the world ultimately lose their faith in fiat currencies, they will realise that all are worse than one another, and that there is only one currency which can't be debauched by the governments, bureaucrats, and politicians: gold.
Incidentally this will also prove the veracity of good ol ' Greenspan's words: "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value."
©2006 Shailendra Kakani. All rights reserved.
Shailendra Kakani is the Research Head of Commodity Research Group, Bombay, India, and the Managing Editor of www.commodityresearch.in.
+91 98678 33034
Bombay, India
-- Posted Thursday, 10 August 2006 | Digg This Article
