CHENNAI

THE HINDU BUSINESS LINE FRIDAY, OCTOBER 15, 2010

OPINION
Offshore
ating oligopolies. The IT industry, led by middle-class, educated people, lacks any formidable lobby with the government, unlike real estate players who have proted from building commercial and residential space for IT. The Government wants to help these developers and large IT rms with SEZs. Small rms with STPI status, which account for 45 per cent of the total employment in IT, would become non-competitive due to international pressures. That would mean lower purchasing power and low growth overall. While the IT sector growth will be high in the rst three years due to the past momentum, the growth will slow down later.
ECONOMIC CONSEQUENCES

www.businessline.in/opinion

11

Dont ignore small IT players

The information technology sector has been the backbone of Indias growth last decade. However, there is now cause for worry, both on account of global factors, as well as indifferent policies.
Vivek Kulkarni

Is the US economy really recovering?

Michael Powell Motoko Rich

large company in Bangalore had advertised for 300 positions. More than 15,000 engineers turned up at the walk-in venue, before the stipulated time. A stampede was reported recently in the engineering college where the candidates were interviewed. In a country which shows about 9 per cent growth, we see over 14,700 candidates not getting jobs. What is the ground reality? According to Tushar Poddar of Goldman Sachs and Pragyan Deb of London School of Economics, India needs to nd jobs for over 110 million youngsters, in the next 10 years. Can India create so many jobs? Japan, Taiwan, South Korea and China rode on manufacturing exports to provide prosperity and jobs in their countries. Can India now repeat the same feat, in services, particularly IT? India has to absorb over 45 million in the services sector alone. The Indian IT sector that has been providing jobs to over six million engineers, and far more indirect jobs in leisure, transport, restaurants, etc., has been the backbone of Indias growth last decade. However, there are now some reasons to worry, both on account of global factors, as well as indifferent policies back home. The global reasons are slowdown due to the nancial crisis and the consequent cut in IT spends, restrictions on visas and protectionist policies in the developed world. Local rea-

sons are indifference towards small companies in favour of large SEZs and creation of local oligopolies.
POLICY INDIFFERENCE

The seeds of the success of IT exports were sown in the liberalisation of 1991, with the creation of Software Technology Parks of India (STPI) scheme. Several small companies took advantage of it and created lakhs of jobs. Almost 50 per cent of job creation in knowledge-based sectors was due to small companies. The STPI scheme has been copied by many countries around the world. The mission statement of Jinan, a Chinese province, is to be like Bangalore. Instead of encouraging this export growth engine that provides well-paying jobs to our youngsters, the government is indifferent to most IT SMEs. Meanwhile, the global competitive environment is changing. There could be a decline in the sector and eventual loss of competitive advantage. China, Indonesia, Vietnam, the Philippines, Russia, Romania and other countries will gradually increase their market share. China is fast catching up with India in terms of English-

speaking manpower. They have 30,000 English training schools. They have made it compulsory for even taxi drivers to learn English. Our politicians preach one thing and practice another. They dont want poor children to study English, despite their own children going to English medium schools. Once the Chinese acquire English uency, many IT jobs may migrate to China. India lacks the killer instinct and allows other countries to get better in software. Consider how China dominates the world in hardware. They have given subsidised loans, provided low cost labour, and maintained a low currency to capture world market in hardware. With a substantial market share, China could increase prices, say, 10 years later and extract a big premium from all countries. None of the countries will be able to set up production facilities, nor will they have the skills to increase output in a short period. Indias policy indifference towards IT, after encouraging it in 1991, will hardly help its cause. India is giving up its competitive advantage in IT. With a

sustainable market share in offshoring, India could have focused on dominating the entire world. On the contrary, the Government does not give high priority to the knowledge sector. It now feels that IT companies are given too many tax concessions, and has decided to withdraw the STPI benets. In spite of tax concessions, IT industry continues to pay reasonable taxes. IT is employment-intensive and salary expenses account for 50 per cent of its revenues. Steel is a capital intensive sector and pays just 2.5 per cent of its revenues to employees. Considering the tax paid by employees, the IT industry pays reasonable taxes. The industry, however, has a few well-known personalities pushing for taxing the industry. While some CEOs are pushing for taxing the industry, their companies are accumulating land that can put any real estate developer to shame. Some of them have accumulated over 15,000 acres in SEZs, implying that large IT rms will not pay normal taxes for the next 15 years. Large IT players are comfortable and growing more rapidly than the medium and small rms, consequently cre-

Stock market analysts, who refused to see the linkages between IT exports and the rest of the economy two or three years ago, reduced their target price for IT companies, but were quite bullish on real estate, commercial space and retail. They felt all these sectors could do well, in spite of IT declining. All these sectors soon fell, when jobs in IT industry declined. The growth of many domestic sectors depends on discretionary spending by IT sector employees. The slowdown in IT will create a huge problem for Indian society with its millions of unemployed youth in the coming decade. The structural inadequacies of our economy will then really start to hurt the fact that domestic growth is hit by red tape, bottlenecks, slow movement of goods and lack of innovative liberalisation in real markets. Politicians continue to stie growth, due to bureaucratic methods in allotting land, change of land use, and countless permissions. Can our government and political leaders rise to the occasion, effect real liberalisation in the economy, encourage small and medium STPI companies, and keep up job oriented economic growth?
(The author is former IT Secretary, Government of Karnataka, and Founder Managing Director, Brickwork Ratings.)

his is not what a recovery is supposed to look like. In Atlanta, the Bank of America Tower, the tallest in the Southeast, is nearly a fth vacant, and bank ofcials just wrestled a rent cut from the developer. In Cherry Hill, N.J., 10 per cent of the houses on the market are so-called short sales, in which sellers ask for less than they owe lenders. And in Arizona, in sun-blasted desert subdivisions, owners speak of hours cut, jobs lost and meals at soup kitchens. Less than a month before November elections, the US is mired in a grim New Normal that could last for years. That has policymakers, particularly the Federal Reserve, considering a range of ever more extreme measures, as noted in the minutes of its last meeting, released Tuesday. Call it recession or recovery, for tens of millions of Americans, theres little difference. Born of a record nancial collapse, this recession has been more severe than any since the Great Depression and has left an enormous oversupply of houses and ofce buildings and crippling debt. The decision last week by leading mortgage lenders to freeze foreclosures, and calls for a national At the current moratorium, could cast a long shadow of uncertainty over banks rate of job and the housing market. Put creation, the US simply, the national economy has fallen so far that it could take would need years to climb back.
SOMBRE CONCLUSIONS

The math yields sombre conclusions, with implications not just for this autumns elections but also barring a policy surprise or economic upturn for 2012 as well: At the current rate of job creation, the nation would need nine more years to recapture the jobs lost during the recession. And that doesnt even account for 5 million or 6 million jobs needed in that time to keep pace with an expanding population. Even top Obama ofcials concede the unemployment rate could climb higher still. Median houseprices have dropped 20 per cent since 2005. Given an ination rate of about 2 per cent a common forecast it would take 13 years for housing prices to climb back to their peak, according to Allen L. Sinai, chief global economist at the consulting rm Decision Economics. Commercial vacancies are soaring, and it could take a decade to absorb the excess in many of the largest cities. The vacancy rate, as of the end of June, stands at 21.4 per cent in Phoenix, 19.7 per cent in Las Vegas, 18.3 per cent in Dallas/Fort Worth and 17.3 per cent in Atlanta, in each case higher than last year, according to the data rm CoStar Group. Demand is inert. Consumer condence has tumbled as many are afraid or unable to spend. Families are still paying off or walking away from debt. Mark Zandi, chief economist of Moodys Analytics, estimates it will be the end of 2011 before the amount of income that households pay in interest recedes to levels seen before the run-up. Credit card delinquencies are rising. No wonder Americans are pessimistic and unhappy, said Sinai. The only way we are going to get in gear is to face up to the reality that we are entering a period of austerity.
STRENGTHS REMAIN

nine more years to recapture the jobs lost during the recession.

China and its Pacic expedition

In 1995, Chinas trade with the 14 island states was $121 million. It now exceeds $1,300 million.
Vidya S. Sharma

no-strings attached aid. Further, China often provides aid in the form of cash, again with no strings attached.
CHINESE DIASPORA

use the terms Oceania and South-West Pacic (SWP) in this article to refer to 14 sovereign island countries (11 are former British colonies and three formerly under the US administration) and the US, the UK and French military bases south of Tropic of Cancer. Besides Australia and New Zealand, other big SWP countries (by population) are: Papua New Guinea (5.17 million), Fiji (0.86 million), Solomon Islands (0.5 million) and Vanuatu (0.25 million). Traditionally, Australia has regarded SWP countries as its backyard. Yet a leader of a newly elected government prefers to visit Beijing rst now instead of Canberra or Auckland. China has the largest contingents of diplomats in the region. Beijings aid to the SWP has increased from almost nil 15 years ago to about $200 million (second largest aid-provider after Australia with about $450 million). Several China experts have estimated that as many as 3,000 Chinese state-owned and private companies do business in SWP. In 1995, Chinas trade with the 14 island states was $121 million. It now exceeds $1,300 million.
NATURE OF CHINESE AID

With Chinese aid have also come new immigrants. They are vastly different from those who left China between the Taiping rebellion and the Cultural Revolution. New immigrants speak mandarin instead of regional dialects, know their history (Chinese version, of course) well and identify with China as a whole not any particular region. They are patriotic and loyal to the motherland. They know their country is an emerging economic superpower and aspiring to be a military superpower. New immigrants may in a distant future become ChineseAmericans or Sino-Australians but in SWP they will always remain Chinese for want of respect for SWP countries. These immigrants are changing the demography and economy of SWP. Some 15-20 years ago, there was not one Chinese-owned grocery store in the Tongan capital of Nukualofa. Now about 70 per cent of shops are owned by them. Fiji-Indians have been leaving the country since the ultranationalists rst assumed power after the 1987 coup. New Chinese immigrants are lling the commercial vacuum created by their departure.
WHAT AID IS NOT

ural resources (example, gold, copper, nickel, timber, natural gas, sh, and so on) yet considering the size of the region, it cannot be considered rich in resources. Therefore, it is neither the search for new markets nor sourcing of raw materials that steers this policy.
FOREIGN POLICY

Before we examine the motives behind Chinas interest and what they mean to India, let us investigate the nature and role of Chinese aid to SWP. While aid from Australia, New Zealand and other western countries may emphasise such things as transparency, better governance, strengthening of civic institutions, China offers a

Some analysts have argued that Chinas rise offers SWP economic development opportunities not available previously. This assessment would be valid if there were any evidence that altruism is the main driver of Chinas SWP policy. Even today, the SWP region offers a very small market (less than 0.006 per cent of total Chinas trade exports) and is too far from sea-routes used by China to export its goods and import energy and other mineral resources. Though SWP has some nat-

The No.1 foreign policy goal of China is reunication with Taiwan. The foreign policy of SWP countries is susceptible to chequebook diplomacy: Six of 14 SWP countries accord diplomatic recognition to Taiwan. Chinas SWP aid programme attempts to deny Taiwan an independent identity. China further uses SWP voting block to gain inuence in international institutions. Generally, the relations between Chinese immigrants and the indigenes are not amicable. Tonga and Solomon Islands witnessed anti-Chinese riots in 2006. Some SWP-watchers have suggested that such riots could occur both in Fiji and Vanuatu also. Chinas deepen-

ing ties with SWC aim to protect its citizens and Chinese property. China-US rivalry in SWP has attracted most analysis. The consensus among defence analysts is that in the long run China aims to ultimately replace the US as the dominant power in the Pacic Ocean. This is reinforced by the fact that China has been deepening its military ties with Tonga. Undoubtedly, this is a development of some concern to both Australia and India. In Australia the subject is seldom discussed publicly. Perhaps because, China is Australias biggest trading partner or it has too much faith in ANZUS treaty. In India, SWP is seen as to be far away and, therefore, out of mind. Fiji is the second largest SWP country. About 40 per cent of its population is of Indian origin (pre-1987, it was 52 per cent). India has gradually let Australia dene its Fiji policy, through such forums as the Commonwealth of Nations, because of its propinquity to Fiji.

Australia has not handled its Fiji relations well. Consequently, Fijis political elite feels closer to China rather than Australia or India. Fiji and SWP generally may be too far away, but they are important to India for at least three reasons: Indias trade with South Korea and Japan passes through these waters, and attention to this region will allow India to observe the capacity and intentions of Chinas blue water navy and protect its increasing trade with North Asia. China is developing military ties with Tonga. Chinese no-strings-attached aid keeps Pacic Island countries civic institutions weak. It is not difcult to buy a passport or launder money in SWP, hide if you are a criminal or land a narco-aircraft. India being a longstanding victim of terrorism needs to watch any potential geographical region wherefrom terrorism may emanate.
(The author is a Melbourne-based consultant on inter-country joint ventures. blfeedback@thehindu.co.in)

This dreary accounting should not suggest a nation without strengths. Unemployment rates have come down from their peaks in swaths of the country, from Vermont to Minnesota to Wisconsin. Port trafc has increased, and employers have created an average of 68,111 jobs a month this year. After plummeting in 2009, the stock market has spiralled up, buoying retirement accounts and perhaps the spirits of middleclass Americans. As a measure of economic health, though, that gain is overstated. Robert Reich, the former Labour Secretary, notes that the most protable companies in the domestic stock indexes generate about 40 per cent of their revenue from abroad. Few doubt the US economy remains capable of electrifying growth, but few expect that any time soon. We still have a lot of strengths, from a culture of entrepreneurship and venture capitalism, to exible labour markets and attracting immigrants, said Barry Eichengreen, an economist at the University of California, Berkeley. But were going to be living with the overhang of our nancial and debt problems for a long, long time to come. New shocks could push the nation into another recession or deation. We are in a situation where our vulnerability to any new problem is great, said Carmen M. Reinhart, a professor of economics at the University of Maryland.So troubles ripple Troubles ripple outward, as lost jobs, unsold outward, as lost houses and empty ofces weigh down the economy and upend jobs, unsold lives. In 2005, Arizona ranked, as houses and usual, second nationally in job empty ofces growth behind Nevada, its economy predicated on growth. weigh down the The snowbirds came and American construction boomed and land stretched endless and cheap. Then economy and it stopped. This year, Arizona upend lives. ranks 42nd in job growth. It has lost 287,000 jobs since the recession began, and the fall has been calamitous. Signs offer discounts, distress sales and rent with the rst and second month free. Discounts do not help if your income is cut in half. Construction workers speak of stringing together 20-hour weeks with odd jobs, and a 45-year-old woman who was a real estate agent talks of her job making minimum wage bathing elderly patients. Many live close to the poverty line, without the conveniences they once took for granted.
SMALL BANKS, BIG TROUBLE

Small banks are a particular disaster, 43 having gone under in Georgia since 2008. (Federal regulators closed 129 nationally this year, up from 25 last year.) Real estate was the beginning, the middle and the end of the troubles. In one deal, dozens of Atlanta banks invested in Merrill Ranch, a 4,508-acre tract of desert south of Phoenix. The deal imploded and took a lot of banks with it. No one was demanding documents or reading the ne print, and mortgage banks were fat and happy, recalls John Little, a developer. Well, that train couldnt keep running. He has a ringside seat on this debacle, as he sits in the ofce of a handsome condo complex he built in west Atlanta. He faced price discounts so deep that he decided to rent it instead. Nationwide banks have no interest in lending to local developers, and the regional banks are desperate for cash and calling in their loans. Little got lucky; he bought out his loan and kept his property. Most of my generation of builders has gone under, he said. Its still spiralling out of control. New York Times News Service

...CH-X