India's growth story
As India continues to grow and surpass unchartered territories one tends to wonder is the trend likely to last forever? The ruling government projects that we will average a growth rate upwards of 8% for the next decade and replicate a China like growth story. One might argue that if China can, so can India, in fact economists like Sanjeev Sanyal predict that we will experience an Asian renaissance much like Europe.
Undoubtedly India’s growth has been miraculous, unlike China, the growth has been despite poor policy implementation, corrupt-unstable governments and snail paced infrastructure development. We have 700 million people who are in the employable age; the number is expected to rise to 829 million by 2015. Which means close to 72% of the population will be young and employable. The demographic change will increase our savings rate close to 35% of GDP, reducing our reliance on external capital to fund our growth. We are potentially entering a period of prosperity not witnessed for more than a thousand years in India.
Post liberalization India has been in a tearing hurry to make up for decades of mediocrity and catch-up with the western economies. While growth has been a constant, the sectors have varied over the last two decades. India’s growth was initially led by IT, now we have sectors like manufacturing, banking, financial services and infrastructure becoming the engines of growth.
The IT services growth has been fascinating, now accounting for 8-10% of the GDP and 30% of India’s exports. Over the last few decades the primary driver for the IT off-shoring business was cost arbitrage. This was largely on account of our large pool of high skilled engineers and wage disparity. But after 20 years of 30% growth, there are close to 2.3 million people employed in the IT sector and the country will be close to a 100,000 engineers short to drive a 30% linear growth
Education
India generates close to 500,000 engineering and science graduates in year and if IT sector has to continue to experience a linear growth over the years institutes will have to proportionately increase the number of engineering seats. This increasingly seems harder as education in the country remains hamstrung. Education reforms are taking forever and the system is struggling to remain relevant. Education sector remains closed to eagerly waiting foreign institutions and therefore will depend on government spends and domestic private investors. Private investors are politically backed, corrupt and have little expertise in running these education institutions. The irony is India spends a meager 4.1% (U.S and U.K both spend 5.7% and 5.3%) of GDP on education which is a paltry sum for a knowledge economy, with 68% literacy and a booming IT sector.
While institutes attempt to crank out more engineers the quality of engineers becomes a challenge. Companies struggle to increase the graduate’s proficiency through factory like training academies that are expected to take in semi-skilled engineering graduates and convert them to highly skilled software engineers. As supply fails to keep pace with the growth salaries are expected to increase by 40% in 2011, further narrowing margins and increasing prices.
What next?
So the writing is on the wall, IT services have to move up the value chain. Given western economies are not yet ready to open up their purse strings, Indian IT services might be a low cost option to IBMs and Accentures of the world. We are already seeing two trends to back the theory, IT companies are beginning to invest into IT consulting, solution accelerators, disruptive technologies and innovations. On the other hand Accenture and IBM are expanding their investments in India. But will service industry transform to eventually change the face of the Indian sweat shops as one US senator commented? Going by recent trends, that is the next logical step.
