India: Over-qualified and Under-leveraged

India has a young, educated and skilled work-force.  By all counts there are over 100 million with a college degree and more....and over 60% of the work-force is under 35 years of age.  This is a vast work force...but this work force is under-levered...legion are the stories of doctors, engineers, professors working in BPO's because of the better pay scales.

In this global financial crisis the tendency has been to focus on balance sheets and accounting statements.  Nothing focuses the mind like billion dollar losses and tanking stock markets.  However, to take a Financial crisis and let it precipitate into an Economic crisis requires more than tanking stock markets.  It requires policies that facilitate retrenchment and protectionism.  And usually, it requires xenophobia and tribalism.

There is no question that the United States is and was over-leveraged.  The standard of living and global resource usage in the US is out of proportion...you cannot have a country with 5% of the population using 50% of the world's energy and producing 60% of the world's garbage.  While Europe was a reluctant but willing partner clearly China and India are not.  A plumber in the United States has a better standard of living than many CEO's in India...if we are to reward merit in a globalised world then a re-balancing is needed.  Either Joe the plumber's standard of living will come down or the Indian workers standard of living will go up...or both.

Capital will flow...and it will flow to locales where the policies are conducive to growth, resources are available and skilled man-power is aplenty.  Unless impediments to capital flowing are enacted.

This is the danger.

Japan is rich...but the Japanese lost decade was due to their internal policies and cultural make-up.  Japan is an 'old' country...by 2020 more than 65% of Japan will be over 60 years old...birth-rate has been falling and they have been running out of workers for two-decades.  Japan has refused to deal with this demographic time-bomb.  Japan has a fundamental phobia against 'gaijin' and keeps itself a homogeneous society.  Until a decade ago you could have owned 25% of a Japanese company but they would not have allowed you on the Board if you were a foreigner.  If a Japanese lived abroad for more than two years he was ostracized on his return because he may introduce strains into the culture at home. I could give many more examples but suffice it to say that these are policies which invite disaster...and they have produced disaster as the Japanese market shows.

To portray the Japanese market experience as somehow portending the market outlook in the United States or anywhere else is sheer folly.  Unless economic policies are enacted that ignited the 'Great Depression' in the United States or cultural traits limit your ability to adapt and change.  Krugman has said:

The economic lesson is the importance of doing enough. F.D.R. thought he was being prudent by reining in ... spending...; in reality, he was taking big risks with the economy... My advice to the Obama people is to figure out how much help they think the economy needs, then add 50 percent. It’s much better, in a depressed economy, to err on the side of too much stimulus than ... too little.

The Indian government needs to move up the reform and investment agenda;  as someone said :  "you don’t ever want a crisis to go to waste."  It is time to increase leverage...it is time to invest in infrastructure...it is time to create opportunities that will bloom in the good times to come....it is time to ensure this Global Financial Crisis does not morph into an Economic Crisis in India.  There is enormous amount of capital waiting in the wings...locally and at the border...it is waiting for the enactment of policies.

The policies enacted during 'these troubled times' will determine the near term and long term trajectory of our economy and markets.