India: From White Collar to Blue

India has joined China as the darling of the global investor community. Much of this is well deserved since 14 years of economic reform have genuinely transformed the economy. However, the main driver of this success has been India’s educated, urban middle class. India’s skills-driven growth trajectory it is about to change. The small but highly educated middle-class is rapidly re-pricing itself. Rapid increases in urban costs (salaries, real estate and so on) will soon mean that cost arbitrage alone will not be able to compensate for shortcomings such as poor infrastructure, complex regulations, legal bottlenecks, inefficient taxation and so on. Does this mean that the India story is about to end? No. The country is about to benefit from a new dynamic – a primary education revolution that will soon make available a mass of cheap low-skill labour. Combined with cheap capital (both domestic and international), this mass of labour can potentially generate a powerful growth dynamic similar to the usual Asian pattern of growth through accumulation of labour and capital. Email: sanjeev.sanyal@db.com