Threat to the urban India consumption story

The India consumption story is broken into rural and urban consumption. The employment opportunities generated in the IT industry are a driver of the urban middle class India consumption story. The employment opportunities generated in the India IT sector are on a path of secular decline. How would this impact real estate, consumer discretionary, autos built up on the urban India consumption story?

Based on NASSCOM data, 31,846 engineers were required to generate $1 billion of export revenue in 2009-10 but in 2015-16, only 16,055 engineers were required to clock the same revenue. Employment generation opportunities halved for the same $1 billion of revenue.  Hiring is down from 4-5 lakh per year about 10 years ago to about 2 lakh per year.

According to data compiled by McKinsey & Kotak Institutional Equities, India’s IT industry required about 3 million people to add the first $100 billion of revenue. However, the number of people required to earn the next $100 billion will drop sharply by about a third to just 1 million people.

As per CEO of Infosys, Vishal Sikka, a “far bigger” disruptive force is emerging in the IT industry “than the flat world shift from about 20 years ago” – automation, enabled by artificial intelligence (AI).

The productivity gains achieved in recent years have largely benefited the wealthy. Second, productivity gains frequently cause upheaval: Both capital and labor can pay a terrible price when innovation or new efficiencies upend their worlds.

We need shed no tears for the capitalists. It’s their job to take care of themselves. Moreover, investors who diversify widely and simply sit tight with their holdings are certain to prosper.

A long-employed worker faces a different equation. When innovation and the market system interact to produce efficiencies, many workers may be rendered unnecessary, their talents obsolete. Some can find decent employment elsewhere; for others, that is not an option.

Source: http://www.berkshirehathaway.com/letters/2015ltr.pdf

We are actively looking at the impact of the changes in the employment landscape on the long term consumption pattern of IT professionals. We are really curious about its impact on the real estate market in Bangalore, Hyderabad, Chennai, Pune, Gurgaon etc. We are also curious about its impact on consumer discretionary and autos. What happens to the service sector servicing the IT professionals?

When we talk up the consumption story in India we are building our hopes around the disbursements from the pay commission and OROP. What about this elephant in the room?



Categories: Stock Views

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