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Outsourcing tremors on Wall St.

Till now, outsourcing hit IT only. But now the impact is in your face, says Dr Bhaskar Dasgupta.

india Updated: Sep 13, 2003 15:10 IST

The India Babble
How is this for a roller-coaster over the week? Up(Mon)-up-down(Tue)-up-down-up(Wed)-down-up (Thu)-up(Friday). The Sensex was all over the place, but thankfully, it was strong directional movements driven by good volume.

The Sensex ended the week at a 29 month high at 3883. The good thing is, this is mostly coming from the retail investors, Mr & Mrs Sharma's and Reddy's in the hinterland are coming out of their shells and investing in the markets. I guess it was the Maruti IPO which started it off. Maruti is the quintessential car which almost all the middle class aspires to, and the ownership of one, firmly puts the owner on the middle class ladder (move over Hamara Bajaj). Given the huge publicity around the Maruti IPO, it has kick started the process of ordinary Indians to join into the equity market bandwagon. About time too!

The news that several financial institutions are thinking about outsourcing their research analyst jobs to India has created a frisson of fear in Wall Street and Canary Wharf/City of London. The pubs were buzzing with the news. You see, till now, the outsourcing and cost cutting movement used to hit the technology sector, far away from the trading floors and the analyst rooms, but now the impact is in your face; people can see business jobs disappearing rapidly.
Once you see that the analyst jobs have gone, then the next stage is the disappearance of the electronic trading jobs to India. Once you consider that 40 per cent of current US and UK trading is electronic in nature (comprising of agency electronic trading, ECN trading and programme trading), these are the first bits of the trading floor which can go. This is not to mention the accountants, lawyers, economists, mathematicians, statisticians, physicists (yes, if you know fluid dynamics, you have a good chance as a quant) in India should be ready to rock!

Apparently the Indian government wants to cut down on the number of public holidays, and its amazing to note that 201 days in 1 year are paid holidays (inclusive of weekends) for public sector workers. Nice one, says tons about the productivity and dead weight of this bunch of white elephants that we are raising. But I am too hard on them, the entire staff of the State Bank
of India has agreed to the full computerisation of the bank. About time too (about 10 years late, but better late than never, I say). Talking about technology, now that Indian taxpayers can submit their returns electronically, one hopes that the abysmal state of tax collection is
improved; one estimate, according to the Financial Times, says that out of a total possible 100 million taxpayers, only 30 million pay taxes.

Furthermore, the tax to GDP ratio is just 9 per cent, which just goes to show how restricted and inefficient the state's revenue raising efforts are. Still, signs of hope indeed. Gosh, any more of these hopeful things and I will soon run out of things to rant about!

The Babble in the Ivory Towers
In an interesting paper by Ousmane Dore, Benoit Anne and Dorothy Engmann of the International Monetary Fund, the authors investigate the impact of the socio-political crisis in Ivory Coast on the neighbouring country's growth rates. Well, as expected, the impact is negative. The Ivory Coast was once considered as a haven of economic prosperity and ecological beauty, but rapidly descended into political, social and economic chaos after a military coup in 1999. The author's took risk index data from 9 countries directly adjoining and near Ivory Coast (inclusive) for a period of 7 years. The results clearly show that the instability in Ivory Coast has a direct impact (instability as well as economic) on the countries directly adjoining it, but less on the countries further away in the region.

The authors finally come up with some channels through which this instability is exported. The first is the impact through trade and transportation, impact through capital flows and current transfers and impact through reduced investment.

Something for the various countries in the numerous conflict zones to think about. Thinking about the political perspective, countries such as South Africa (wrt to Zimbabwe), India (wrt to Pakistan, Nepal, Burma, Sri Lanka and Bangladesh), the entire Middle East, Central Asia etc. For countries which are more interested in economic growth and prosperity for their citizens, having an ostrich like attitude towards conflict in neighbouring countries does not help, as the conflict will impact them significantly.

South Africa has been mum on the Zimbabwe crisis; India has been more proactive on the Nepalese and Sri Lankan issues; Jordan has realised that economic prosperity counts for much more than empty silly slogans for conflicts, etc. etc. So it cuts both ways, you don't go about starting conflicts with neighbouring countries, and if a conflict does come up, you help to stop it. Simple, no?

Details of this paper and past columns are available on
http://beady.blogspot.com

The World Babble
Ouch at NASDAQ's performance this week, a 4.1% drop to 1644 (Cisco pessimistic outlook and Microsoft's anti-trust news helped in that drop!), DOW ended up at 9191, barely above market open, S&P500 at 977 down 0.36 per cent.

On first sight, it does look like a head for the exit, but the market was mostly consolidating its gains. Chipmakers and IT companies kept on getting hit by the markets, although there was reasonably good economic news, such as the non manufacturing index was highest in July for 6 years but employment is still weak. Job claims dropped below 400k, for the first time since February but the situation is still dicey. Goldman Sachs reported a survey of CEO's who said that they are planning a spurt of capital spending and even considering acquisitions.

Productivity jumped in the second quarter at an annual rate of 5.7 per cent, which is good for the corporate profits, but not so good for the jobless. Usually, this is good, as it means that you are producing more for a given level of inputs, but in case of recessions, it means that job creation is not happening and this is a worry for the nation in the coming months.

Europe ended up just near where it started, 0.4 per cent down at 869. The news that Italy slipped into recession in the second quarter is rather worrisome for Europe, but recovery seems to be patchily coming along. The Footsie did better, ended up at 4147, up 1.2 per cent driven in part by BSkyB's winning of the British Premiership broadcasting rights. Funnily enough, the world famous German automobile industry, famed for its reliability, got a big shock this week when the "Which" magazine released reliability figures for a variety of cars. Most of the "excellent" cars were Japanese and the only German car making it to the "best" category was the Smart car. So not content with a rapidly rising Euro, significant overcapacity, falling sales, US market stuffed, now their main selling point, "reliability" has been shown to be rather wanting.

Over on the French side, the government EUR 2.8 billion bail-out for Alstom is creating a ruckus, another rather sad episode in the long list of French bailouts for their cosseted companies. The European Commission is making noises about investigating this bailout, but prior experience tends to make one doubtful whether this will succeed in curbing this bail-out tendency of European countries to protect their "national" champions.

Talking about the European Commission, it's resurrected its old fight against Microsoft. The EC is moaning about Microsoft's Media Player and wants it to remove the player from the O/S. I very much doubt that Microsoft will like that, it's a core part of its strategy to integrate even closer to the net and consumer entertainment.

Guess what? Japan is going to go into a new trade, exporting its centenarians to countries like Philippines, where they can be cared for in their old age. There won't be enough carers in Japan and they don't want to let the Filipino's immigrate, so what's the best thing? Let's send the mountain to Mohammad. Seriously, old age health care is rapidly going to become one of the biggest earners in the low cost countries, such as Philippines and India. Watch out for this industry booming.

Oil prices hit a high, driven by the fears of Iraqi pipeline sabotage and Brent Crude hit levels not seen since the war, it went beyond $30 per barrel at one time, but dropped once the market was given evidence of higher than average inventories in the USA.

China seems to be shrugging off the pressure to revalue its currency, even though there is a steadily rising clamour from Japan, south East Asia, USA and now the Europeans have joined in as well. The market tends to think it's doubtful that the Chinese will revalue, despite of the pressure, mainly because of three reasons, if they do revalue, their fuel bills are going to shoot up and secondly, the value of their overseas holdings will collapse, and finally, the Chinese crave stability above all things. Mind you, the 65 per cent of Chinese exports originate from industrial units which have been financed by FDI, so the arguments for revaluation are a bit specious anyway.

Just to give an idea, Japan spent more than $38 billion in just the last 3 months until June to keep the Yen-USD rate stable. This is gob smacking and shows the stranglehold that the "export led growth" strategy has on the country's economy. Without this intervention, the yen would have appreciated to at least 105-110 and that would have hit the economy by half a per cent.

(Dr Bhaskar Dasgupta writes a weekly Monday round-up on markets and indicators. He holds a Doctorate in Finance and Artificial Intelligence from Manchester Business School and works in London in diverse capacities in the banking sector.)

First Published: Sep 13, 2003 15:10 IST