Economic Growth of Phillipines Impacting Indian Economy

Macroeconomics Project

Does the Economic growth of Philippines impact India

Introduction
The Economy of the Philippines is the 40th largest in the world according to 2012 International Monetary Fund statistics and it is also one of the emerging markets in the world. The Philippines is considered as a newly industrialized country, it has been transitioning from one based on agriculture to one based more on services and manufacturing. According to the CIA Factbook, the estimated 2012 GDP (purchasing power parity) was 424.355 billion. Goldman Sachs estimates that by the year 2050, the Philippines will be the 14th largest economy in the world.

Review of Literature (Earlier Studies)
The Philippine economy has continued to grow since President Ramos took over the presidency. President Ramos was driven by his dream to make the Philippines as one of the fastest growing countries in Asia. He did not fail in achieving his goal for the country, since the Philippines was able to attract investors to bring in money into the economy. This resulted to an increased capital investment in the country, allowing the Philippines to be labeled as the Tiger Economy of Asia. This makes the Philippines an attractive venue for foreign and local investors, despite the current situation of the Thai currency. This is also the perfect time for investors to engage in projects that would result to higher returns in the future, as they would be able to capture all the benefits during the upswing of the economy. During a period of low economic activity, current investors may adopt the “wait and see attitude”, while risk-taking investors would consider investing in the country since the Philippines is believed to endure crisis due to its fast growing economy and live up to its label as the Asia’s Tiger Economy.
Reforms in the areas of trade and investments are implemented by the government. Also, deregulation of the different products and services market (including the financial market and telecommunications sector) are given priority, since the government believes that this is the right time for these sectors or market to grow and develop. Because of the country’s strong economy, the Philippines became more attractive to foreign creditors, and this is seen to extend for a long period of time. For the telecommunications industry, there is a large market that has not yet been reached by the existing infrastructure, thus an opportunity for the new market players (which are relatively few) to capture this untapped market.

Need/Importance of the Study
Undoubtedly, India and Philippines are the big players in the outsourcing business. There is a lot of competition between the two countries over the projects and over the future. India and China are having a big threat because of rise of Philippines. Today India is a world leader in outsourcing but it seems that this trend is changing.
Today if we compare India and Philippines outsourcing market on the basis of workforce availability then we can say that India has the upper hand. But it is seen that Philippines have cheap labour and this is been used to capture the market. Although English accent is not considered as a essential tool in all the outsourcing jobs, but it does play an important role. There is some criticism that Indians have a thick accent but it is improving in the younger generation. But if we see the Filipino accent, it is considered to be of a better quality and it has contributed tremendously to its growth. “Philippines has become the call centre capital of the world with its 350,000 call centre employees whereas India 's 330,000 workforce”, said the Contract Centre Association of the Philippines (CCAP). Besides call centre operations, the country also takes pride in its growing medical transcription outsourcing industry. It is significantly because there is large pool of medical-related courses graduates. Philippines is also catching up in the technology field. Another factor that has aided in the country 's growth is the transfer of operations to the Philippines from Thailand by flood-disrupted businesses as well as improved electronics exports.
However as stated earlier India is still leading the rank. But it is been said by the experts that in the race of best outsourcing industry if India doesn’t take any step, Philippines will easily surpass it. Also more and more studies show that many companies have started preferring Philippines, in spite of its rationally higher labour cost when compared to India. The reason for this is thought to be the higher quality of customer service that Philippines offers, compared to India.
Considering above, we in this paper are going to analyse how rise of Philippines can affect India’s growth.

Statement of the Problem
Can the rise of Philippines have an impact on the Indian economy?

Objective of the research paper INDIA | | | | | | Year | GDP Growth Rate (%GDP) | Inflation Rate | Fiscal Balance | CA Balance | FDI (%GDP) | 2008 | 6.7 | 8.1 | -8.4 | -2.4 | 3.5 | 2009 | 8.6 | 3.8 | -9.3 | -2.8 | 2.6 | 2010 | 9.3 | 9.6 | -6.5 | -2.7 | 1.5 | 2011 | 6.2 | 8.9 | -7.9 | -4.1 | 1.7 | 2012 | 5 | 7.5 | -6.9 | -5 | 1.05 | PHILIPPINES | | | | | Year | GDP Growth Rate (%GDP) | Inflation Rate | Fiscal Balance | CA Balance | FDI (%GDP) | 2008 | 4.2 | 8.3 | -0.9 | 2.1 | 0.8 | 2009 | 1.1 | 4.1 | -3.7 | 5.6 | 1.6 | 2010 | 7.6 | 3.9 | -3.5 | 4.5 | 0.8 | 2011 | 3.6 | 4.6 | -2 | 3.2 | 0.8 | 2012 | 6.6 | 3.2 | -2.3 | 2.9 | 2.28 |
This research paper is an attempt to understand the recent spurt of economic growth in Philippines, the various factors contributing to the growth of the economy and the factors that will sustain the high growth rate in the future.
The research study will also try to understand the impact of rise of Philippines on the Indian economy. The aim is to understand whether the rise of Philippines will have a synergistic or cannibalistic impact on the Indian economy.

Hypothesis
India will be impacted by rise of the economy of Philippines and will lose out to it.

Research Methodology
We used regression analysis to see the reliance of country’s GDP on the four factors mentioned below viz. Inflation rate, Fiscal balance, Current Account balance and the FDI as a percentage of the GDP.
The data for the factors along with the GDP growth (from 2008 – 2012) is given in the below table for both the countries.

Results & Discussion
R2 for GDP of India vs. Inflation, Fiscal Balance and Current Acc Balance = 76.5%
R2 for GDP of Philippines vs. Inflation, Fiscal Balance and Current Acc Balance = 98.4%
R2 for GDP of India vs. FDI (%GDP) = 4.3%
R2 for GDP of Philippines vs. FDI (%GDP) = 0.02%

Findings
Since the GDP of Philippines is more closely reliant on Inflation, Fiscal Balance and Current Acc Balance, the growth in the country can be maintained at the growing pace with current Fiscal and Monetary policies. There is strong Government and FDI investment in infrastructure in the country as opposed to India.
Philippines GDP grew by 7.8% in the first quarter of 2013, faster than China (7.7%), Indonesia (6%), Thailand (5.3%), and Vietnam (4.9%) owing to the strong performance of the manufacturing and construction sectors, as well as the increase in government and consumer spending.
The industry sector, composed of mining, manufacturing, and construction, grew by 10.9%, higher than the recorded 5.3 and 8.9% during the first and last quarter of 2012. The Mining and Quarrying industry contracted by 17% in Q1 of 2013, compared to 1.7 and 2.8% increase in the first and last quarter of the previous year. Manufacturing industry grew by 9.7% this year, higher that the 6 and 5.5% in the first and last quarter of 2012. Construction industry, meanwhile, further increased to 32.5% compared to 29.9% in the fourth quarter of 2012. The services and agriculture sectors also contributed to the growth with 7% and 3.3%, respectively.
Domestic consumption is the main driver of growth, fuelled by remittances from about 10 million overseas Filipino workers. In 2012, overseas Filipino workers sent back $24 billion, which accounted for 10% of the country’s economic output. It makes the Philippines the third largest recipient of remittances in the world, after India and China and on par with Mexico.
Philippines faces a risk of receiving too much capital inflows as advanced economies implement quantitative easing. The country aims to constructively utilize these funds to develop the necessary infrastructure.
In recent years, economic growth has been driven largely by a rapid expansion in the services sector, which now accounts for almost 60% of GDP. Manufacturing sector contributes another 31%, rest being agriculture. In 2012, FDI into the manufacturing sector surged to $1.03bn, from just $119.4m in 2011 and a net outflow of $1.3bn in 2010.
Currency Analysis trend: Philippine Pesos vs. INR
INR has shown a growth trend against the Pesos since 2011 onwards but is now losing its strength as the Rupee deteriorates and Pesos strengthens.

Recommendations/Suggestions
Growth in Philippines started late 1980’s, after the introduction of policies favourable for investment like liberalization of foreign investment and privatization of public firms. Through years Philippines developed competency in several sectors which possess great threat to Indian economy in near future. India should implement set of policies and reforms to make it a better place for investment and industrial growth. Process of liberalization privatization and globalization made India an Ideal place for investment for many years.

Main sector which helped to propel the growth was boom in service sector which contributes to 55.6%age of GDP. Contribution of invisibles helped India to control current account deficit, with growth of economies like Philippines, revenue from service sector will get reduced. One of the important reasons for increasing investment for service sector jobs in Philippines than India is their high literacy rate. They enjoy a High literacy rate of 94% which is way better than India. Their accent is also better than Indians which helped them to attract BPO jobs to country. India Has to Focus more on improving its literacy rate and use its cheap labour force to gain investment back to country, promoting the usage of internet among more people will help to achieve this feat. India should utilize its advantage of reliable band width due to secret undersea cable and raise the competency in English to compete with the high customer oriented approach by Philippines service sector.
Mining sector and manufacturing sector which has slow down due to series of scams needs a boost to increase the productivity of the country. Trading partners of both of these countries are almost similar so India needs to be competent enough to capture the opportunities and a favourable investment environment.
Government and central bank should take measures to cut the high interest rates which slow down the growth of industries in the country. Quality of government Expenditure of Philippines is high compared to India. Expenditure is mainly on revenue expenditure and main component is of interest expense. The state’s economic presence is mainly remains extensive through PSU’s and wasteful subsidy programs that result in chronically high budget deficits.
Government has to start dilution of public sector enterprises shares to raise the money. This will help to contain fiscal deficit and current account deficit around 4.8% of GDP. Government should make more investments on infrastructure development to stimulate growth and increase in investment. Another reform should be on complex and unpredictable tax structure is a main hindrance on capital investment by private and foreign firms. There should be reforms on tax sector and tax sops should be given to service sectors to help them increase its competence from countries like Philippines.

Conclusion
Quality of expenditure, highly competent service sector, and low interest rates makes Philippines lucrative market for investors. Philippines and India are highly dependent on service sector performance and FDI’s. Rating agencies have upgraded the rating of Philippines from BB+ to BBB- which is stable investment rating which will help to attract more investment to country. Provided the policy paralysis and high dependence on FDI in GDP growth of India, increasing and steadily increasing FDI inflow of Philippines will be a major threat to India.
References
http://www.philstar.com/business/2013/07/05/961637/phl-catching-fdi-citi http://www.abs-cbnnews.com/business/06/10/13/foreign-direct-investments-drop-85-pct-q1 http://www.globalsky.com/india-vs-philippines-a-comparative-analysis-between-the-global-leaders-in-outsourcing/ http://www.indexmundi.com/facts/philippines/foreign-direct-investment http://newsinfo.inquirer.net/417531/philippines-is-fastest-growing-asian-country-for-first-quarter-of-2013#ixzz2avdMVtCp http://www.globalsky.com/india-vs-philippines-a-comparative-analysis-between-the-global-leaders-in-outsourcing/ http://edition.cnn.com/2012/07/12/world/asia/philippines-surprise-surge

References: http://www.philstar.com/business/2013/07/05/961637/phl-catching-fdi-citi http://www.abs-cbnnews.com/business/06/10/13/foreign-direct-investments-drop-85-pct-q1 http://www.globalsky.com/india-vs-philippines-a-comparative-analysis-between-the-global-leaders-in-outsourcing/ http://www.indexmundi.com/facts/philippines/foreign-direct-investment http://newsinfo.inquirer.net/417531/philippines-is-fastest-growing-asian-country-for-first-quarter-of-2013#ixzz2avdMVtCp http://www.globalsky.com/india-vs-philippines-a-comparative-analysis-between-the-global-leaders-in-outsourcing/ http://edition.cnn.com/2012/07/12/world/asia/philippines-surprise-surge