Search:



The Web

Rediff








Home > Business > Business Headline > Report

Similar problems, dissimilar solutions

March 12, 2004 13:08 IST

Just as the bull market in the US is about to celebrate its first birthday today (it was exactly a year ago when indices hit the bottom and sparked off a bull rally), it would certainly not rank as the best of celebrations.

A strong selloff on Wednesday pushed the benchmark index Dow into the red for the year. Similar damage was inflicted upon the Nasdaq a day earlier. Story on the Indian bourses is no different.

The benchmark indices are behaving in an extremely volatile fashion and have failed to signify a clear trend. Although two of the world's most powerful and the biggest democracies are expected to go to polls this year, uncertainties regarding the same alone could not be the reason for the lackluster behavior of the stock markets in these countries. There is a bigger and more fundamental problem, which is staring these countries in the face and that is of inadequate job creation.

Despite the fact that the US economy showed its highest GDP growth since 1984 for two successive quarters (it grew 8 per cent and 4 per cent, respectively, during the third and fourth quarter of 2003 on a YoY basis), job creation continues to remain weak as the unemployment rate was held at a steady 5.6 per cent during the month of February.

Most of the economists have expressed surprise at the numbers and felt that the payrolls outside the farm sector, which grew by just 21,000 jobs in February, should have been in the region of around 125,000 new jobs. This stagnancy in job creation, despite the robust growth in GDP could be attributed to a couple of reasons. The sluggishness could be on account of the technological advances in the US economy, which has led to increased productivity of work force.

This in turn has suppressed new job creations, as businesses have been able to increase their output with the same level of labor inputs on account of increased productivity.

Another probable reason could be the fact that the US businesses have managed to squeeze costs and thus generate more profits at the same level of output.

Outsourcing of jobs, mainly in the services sector field of IT, is one of the primary ways to achieve this. Taking advantage of the cost arbitrage opportunities existing on the wages front, US companies have been able to cut their costs significantly and boost their profits, at the expense of those employees, whose work have been shifted to low cost destinations like India.

However, we believe that the amount of jobs that have been lost to outsourcing are pretty insignificant in number and would not cause much of an impact in the longer term. In fact, it is a well known fact that if a country has to prosper, then it has to move higher up the value chain in terms of its product offerings. Thus, loss of lower value added jobs to their Indian counterparts would enable the US workforce to move onto something, which is higher up the value chain and which results into higher profits.

Justification for this could be deduced from the fact that the low value add manufacturing jobs in the US are increasingly being replaced by imported Chinese goods, thus leaving the US manufacturing sector to manufacture high end products like the niche aerospace and cryogenic technologies.

So the likelihood of a similar act being repeated in the services sector especially IT, cannot be ruled out and therefore outsourcing of US jobs is probably not that big a problem as its being made out to be.

As far as stagnation of jobs due to higher productivity is concerned, we believe that at a given level of investment, there is a limit to which productivity can be increased and as a result consistently increasing demand will have to be met with fresh investments, which would ultimately result into new jobs.

Thus, while presently the US economy is reaping the benefits of improved productivity, rising demand on account of lower interest rates and tax incentives would ultimately force the US businesses to go in for expansion thus leading to greater job opportunities.

Therefore, on account of these reasons we feel that given the strong macroeconomic indicators, it is only a matter of time before the US economy shows signs of significant job creation.

While the long-term sustainable job recovery in the US markets could be a possibility in the not so distant future, there are no such luxuries for its Indian counterpart. Although advancements in communications technology have been able to blur geographical boundaries and has led to excellent job opportunities for the country's vast pool of technically skilled and cost competitive man power, a staggering 40 per cent of the country's populace still lives in an impoverished condition.

The country thus cannot afford to make too much out of its success in IT-related fields, as the benefits of the same are available to only a small fraction of the country's populace.

Close to 70 per cent of the country's population depends upon agriculture for its livelihood. Therefore, if the country has to put itself on the path of a long term sustainable GDP growth rate in the region of 7-8 per cent or thereabouts, job creation in the field of agriculture and its allied activities should be given a top priority.

For example, India is among the top five producers of fruits and vegetables in the world but its share in the processed fruits and vegetables market is a paltry 1 per cent. Therefore, if adequate investments are made to ensure the processing of the same, then it can lead to both wealth as job creation. Examples like this have to be backed by friendly policies.

The government has to make sizeable investments in infrastructure and encourage entrepreneurial initiatives. Only then will adequate job creation become a reality and put us on a long-term sustainable growth path. Other wise while one year India might shine mainly on account of good monsoons, it might whine the year the monsoon fails.

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.



Article Tools
Email this article
Print this article
Write us a letter
Discuss this article




People Who Read This Also Read


Are unit-linked plans good?

Mukesh Ambani's telecom thrust

The 'third man' in Reliance empire












Share your comments







Copyright © 2005 rediff.com India Limited. All Rights Reserved.