Hii all, This is my first article in my blog, forgive me for the mistakes you find and let me know the same to correct it in future. This question (the title) popped into my head when I was listening to the current president elect of USA Mr. Trump in his 3rd and final public debate with Hillary. The reasons for the higher growth rate enjoyed by India and also why its brain gain and not brain drain is explained in detail in this article.
To those who are not aware or not clear of what GDP is?? Please read the following sub head first. If you think you know GDP lets skip the below sub head and get into the discussion below it…
WHAT IS GDP ??? – AN OVERVIEW…
Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period. Though GDP is usually calculated on an annual basis. GDP includes all private and public consumption, government outlays, investments and exports minus imports that occur within a defined territory. Put simply, GDP is a broad measurement of a nation’s overall economic activity.
Gross domestic product can be calculated using the following formula:
GDP = C + G + I + NX
Where
C = to all private consumption, or consumer spending, in a nation’s economy,
G = the sum of government spending,
I = the sum of all the country’s investment, including businesses capital expenditures
NX = the nation’s total net exports, calculated as total exports minus total imports (NX = Exports – Imports).So after knowing what GDP is now we can start the discussion about G D P.
GDP growth rate of Countries in Discussion (Source: Wikipedia)
India – 7.1
United States of America – 2.6
What are the major contributors to the higher growth rate of India’s GDP ??
Considering INDIA’s GDP growth rate at 7.1%, we will discuss the major contributors to it.
You all now should be knowing, that GDP has four parts C,G,I and NX.
The major contributors to Indian economy’s GDP growth should be C and I.
Why it’s not G and NX??
India’s excelling in exporting services to other countries but our conditions are pathetic in exporting goods, rather we can simply say we import a lot more goods than what we export. This high export of services balance the imports of goods and so this net off will not contribute much to the GDP. We can even say it will reduce the GDP by going Negative. I.e the import of goods will be more than export of goods and services put together.
Government can spend only out of its income. Income of Indian government primarily constitutes of its taxes, for the taxes to grow the C and I should be growing, as G is dependent on I and C let us not talk about G, and if you ask me what about the revenues from government companies and the fees to government services, they are nowhere near the cost of running those companies. The cost of running is high because of the Infrastructure and the salaries of non-competitive employees.
It’s C and I
Why people invest in India??
Let us talk about investments first, Investments has gone up like nowhere in history due to the foreign direct investments into all the new promising startups in our country, thanks to all the venture capitalists for contributing the growth of GDP by investing in India.
So why all investors are focusing and investing in India:
India is a developing county. It is now in the stage of moving from the developing to developed. The major attraction for investing in India is its Population. We all know India is second most populated country, competing with China to become number one :p. The population of one of the states in India will be the population for many countries across the globe. As the population is high there are higher probabilities for a product to succeed, but even if it fails the trial run sample size itself in most cases assure break even for the investor. Simply, More population promises more customers to the company.
Investing in new ideas which have the trails of success will surely be an apple pie to all investors. As we are also growing in technology with no home ground innovation and research and development, we are more relying on the other countries for our technology growth. We get exploited on this area, which sets the loop hole for more imports of: a) technology finished goods and b) expertise knowledge, and makes our NX figure negative. The solution for this will be strengthening India with rich Research and development organizations for technology.
The startups are tested in certain geography of India only, but when the investments get increased, the improvements or say customization to product to suit different geography and culture of India is made which increases the sales, in turn it increase the total income and returns to the investors, which will increase the value of the company and it will again attract more Investments. One can see a positive vicious cycle being created with some constraints like customers choice, competitors performance etc.,
More attraction to investments in India can also be pointed out to our lower currency value. The average value of Investment in a startup in India when compared to any startup in USA will be quite low from the Investors point of view. The contribution to GDP from investments will only be next to the consumption of Indian population.
The Consumption in India is not just from people in India…
The C = Consumption, consumer spending in India is not just from people in India, but also from people outside India The consumption in India has its source not only from the income generated in India but also from the income generated from countries outside India, because of the global presence of Indians. . This is not a common scenario in all countries. When the highly educated and qualified citizen of India gets out of India to other country for higher earnings we call it a brain drain, but I see it as a brain gain. When an Indian gets out of his country he goes out for the only motive of money. So when he gets it, he always thinks of saving his income and sending back home, after spending his necessities. Indians, as we are all brought up in an economy where people tend to save for their future it is no surprise to see. Indians are patriotic enough to think of future in India after working for USA and earning all in American Dollars and investing their savings in India, to settle back in their hometown after retirement.
Even when the Indian economy faces a lull to get its source of income within its boundaries from its residents, it gets from its citizens and origins residing in other countries that too not in INR but foreign currency, without exporting anything. We always have a backup or booster. Back up when we are in bad situation and a booster to our growth when we grow. This part will be constant no matter what happens in our political scenario.
After seeing so many reasons for our higher growth rate in GDP now I think it’s time to shift our focus on why USA got lower growth rate.
Why Americans have lower growth rate of GDP ??
As seen in India, the C factor only will decide the growth rate of GDP of any country. Other than that the investments can make an effect, the current situation of investments in USA is all the industries located in USA are moving out of USA to Mexico and other countries as the laws are stringent and the tax rates are higher. The government’s spending and investments is also not towards GDP, rather it’s invested on military protecting the allies of USA (NATO) leaving behind their own economy. The real problem for Americans is not that they aren’t making money. The problem is money is made by small percentage of Americans there who has so much money – not spent, not invested, finding no other place, even after spending all their earnings in all luxurious items in all possible ways. It means the rich get richer in America and the poor get poorer. The majority of American population has no enough money to spend for their comforts i.e over and above their necessities, but the wealthiest would have spent over luxurious goods and not much on comforts and necessities as necessities and comforts will lose its demand after a limited level of consumption by people. GDP can grow only when majority of population spends, as only then the consumption becomes more and the real growth happens. It is briefly explained in the following paragraphs.
Why I Say they are not making enough money?
We all know that the blue collar employees makes less money than the white collar employees. The majority of white collar positions in USA are taken care off shore by outsourcing it at lower costs (which we saw earlier as export of services for India) and the remaining white collar positions are majorly filled by Indians and other Asian groups residing in USA.
You can ask me Indians are only majority of immigrants and not the majority of population, but then how we affect their economy??
Here comes the answer, Indians are less when seen as percent of total population, but their earnings are more than what most of the Americans get (leaving out the Hollywood celebs and the industrialists; comparing with common man), as Indians/Asians form the majority in the higher income groups of America. Though they are not majority in total population, they have super majority (i.e. should be more than 90%) in white collar jobs of USA including their off shore offices.
This happens because in USA the college fees are Himalayan high and no child there gets support from their parents for their tuition fee like we do here. We all get loans from banks here finish the courses there and pay back after getting a job. Where the American youths have to work for their college fees, save and then do their higher studies which is a dream to majority of Americans. This plays in favour to us.
More over as the period goes the Indians promote and take the big positions like satya nadella and sundar pichai do now and also occupy the lower position to them in white collar jobs, which gives them huge sum in US dollars, which is not spent but saved and sent back to india, as discussed earlier. Americans settle down in some blue collar jobs and get lower income and so their spending will be low and their GDP doesn’t grow.
But don’t forget that we all are working for few of those American bosses who get profited by all our work, by raking in huge profits.
Few can ask me there are even afro americans, why the effect is only from Indians and other Asians and not from Afro Americans. Afro americans are unlike Indians and other Asians; they have become part and parcel of America, most of them are grown up there, follow American style of economy which is they donot send back money to Africa, if that had happened Africa would have grown to be an unbelievable economy.
The Future:
The future of it can be assumed in following ways:
The current situation of India, post demonetization shows lower consumption by people which may affect our GDP in coming year. More importantly Indian economy is not as independent economy as USA Economy. The current higher growth rate can only be seen as temporary effect. Further as time goes the current Indian population in USA will get settled by getting citizenship in USA, their family also becomes USA citizens and spending their earnings in USA will see an increase and over a period of time, they all will be in USA and all their income will be spent in USA only. In long run only USA stand to gain. Also if they cut off their offshore business with India we stand to lose.
Americans can overcome the hard situation they are facing today by reducing their higher education tuition fees and prioritizing Americans for white collar jobs. (OR)The American youths can move to other countries like Pan-Asian countries where the education cost is considerably low but can get reasonably good education (like our IIMs).
Conclusion:
The above article is authored by Arun Balaji.B, which is me (roving mind) and proof read by my economics guru Shrimathi Bhanumathy Sivakumar. The article is pure form of my thoughts, my knowledge in economics and world news combined with my power of imagination. I will be so pleased if you suggest me for improvements, you can also convince me on any of the points you contradict with in this article. Thanks for your time. Keep coming to my blog on more interesting articles every week ….What’s for next week? – you got to wait for it :p
Email: [email protected]
To those who feel the article is full of crap and nothing else …
PEW research Centre says:
http://www.pewresearch.org/fact-tank/2014/09/30/5-facts-about-indian-americans/
An Interesting article by ABC news:
“Just as millions of American manufacturing jobs were lost in the 1980s and 1990s, today white-collar American jobs are disappearing. Foreign nationals on special work visas are filling some positions but most jobs are simply contracted out overseas.
“The train has left the station, the cows have left the barn, the toothpaste is out of the tube,” said John McCarthy, director of research at Forrester Research, who has studied the exodus of white-collar jobs overseas. “However you want to talk about it, you’re not going to turn the tide on this in the same way we couldn’t turn the tide on the manufacturing shift.”
India Calling
Almost 500,000 white-collar American jobs have already found their way offshore, to the Philippines, Malaysia and China. Russia and Eastern Europe are expected to be next. But no country has captured more American jobs than India.
In Bangalore, India, reservation agents are booking flights for Delta; Indian accountants are preparing tax returns for Ernst & Young; and Indian software engineers are developing new products for Oracle.
They are all working at a fraction of the cost these companies would pay American workers.
For example, American computer programmers earn about $60,000, while their Indian counterparts only make $6,000.
“It’s about cost savings,” said Atul Vashistha, CEO of NeoIT, a California-based consulting company that advises American firms interested in “offshoring” jobs previously held by Americans. “They need to significantly reduce their cost of doing business and that’s why they’re coming to us right now.”
Vivek Pal, an Indian contractor for technology consulting group Wipro, whose clients include Microsoft, GE, JP Morgan Chase, and Best Buy, is hiring 2,000 Indian workers quarterly to keep up with demand.
“If you sit at a desk, beware, your job is going overseas.”