This three decade old crisis may cripple India Inc.

Oct 25, 2011

In this issue:
» Coal shortage deepens at power stations
» RBI hikes rates for the 13th time
» Cost of Asian debt is rising
» China's one-child policy poses a problem
» ...and more!
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India's growth story has caught the fancy of many investors across the world. Amongst many reasons cited that will bolster the country's economic growth, one that has been consistently doing the rounds is the country's demographic dividend. Indeed, a burgeoning young population would certainly be a strong asset that could take India's growth to the next level.

But it is not that simple. First of all there are questions whether the skill set of people will be sufficient enough to garner quality jobs. But another issue that India Inc will have to contend with is growing labour issues. Take the example of the labour unrest at Maruti's Manesar plant. While it has severely crippled the company's production and impacted its performance, there are increasing concerns that labour issues could spread beyond the auto industry to other manufacturing sectors as well. This is because industries such as capital goods and chemicals also boast of operational dynamics similar to automobiles. This is in contrast to the labour dynamics either in the IT or the construction sector. For instance, in the IT sector, with a 30-35% attrition rate, employees in such firms do not stay in one company for long enough to form a union. In construction, which is characterized by many low skilled jobs, migrant labour has a much lower chance of forming a union and giving trouble to the management.

The crux of the problem at Maruti has been that it has an increasing number of contract workers. These have been paid lower rates as compared to their permanent peers although the work extracted from them has been nearly the same. Maruti and any other company for its part have probably been lured by contract labour simply because India's labour laws are too rigid. For instance, under the Industrial Dispute Act, a firm which employs over 100 workers cannot retrench a permanent worker without government permission. No wonder the companies are far more comfortable hiring contractual workers. In times of an economic slowdown, it gives them the freedom and the flexibility to downsize the workforce if the situation calls for such a step.

Of course, problems are not new to India and the country has witnessed paralytic labour unrest in the 1970s and 1980s as well. Although one solution to this problem is for the management to consistently have communication channels open, it goes without saying that from a longer term perspective Indian labour laws need a serious overhaul. One that gives greater weight to linking pay and benefits with performance. Otherwise, stalled production and increasing unrest will hardly add anything to India's economic growth, but will take a lot away from it.

Do you think labour laws in India need a major change? Share with us or post your comments on our Facebook page.

 Chart of the day
Coal woes of the Indian power sector don't appear to be easing off. This is despite the claims made by the Coal Ministry that coal companies have stepped up the dispatches to the power stations. As per the latest data reported by CEA (Central Electricity Authority), number of power stations with less than 7 days of coal has actually gone up in the past one month. (Power stations are required to hold between 15 to 30 days of coal stock). The situation has actually worsened through the month of October instead of getting better. The only time, the situation improved was in the week when the Coal Ministry came out with their claim. Otherwise the situation has gone from bad to worse. Now the number of stations with less than 4 days of stock stands at a whopping 32 as compared to 21 in the beginning of the month. Unless the Coal Ministry starts converting their claims to reality, Indian states may soon see a blackout. And it would be as dark as the coal required to run the power plants.

Data Source: Hindu Business Line

The Reserve Bank of India (RBI) declared its monetary policy review for the second quarter of the financial year 2011-12 today. High fuel prices coupled with rapid currency depreciation and persistent inflation forced the hand of the RBI once again, for the 13th and maybe the final time since March 2010. The RBI raised the rates at which it lends to banks (repo rate) by 0.25%. Thus the repo rate now stands at 8.5% from 8.25% previously. The rate at which RBI borrows from banks (reverse repo) now stands 7.5% post the review. The central bank left the cash reserve ratio (CRR) unchanged at 6%. The RBI was concerned that even with successive rate hikes, and slowing growth, inflation continued to remain above comfort levels. It has remained persistently high, affecting the margins of companies and wallets of individuals. Thus, the central bank decided that it was not yet time for it to roll back on its monetary tightening. However, if inflation moderates, further rate hikes may not be necessary. Thus, the bank can then address pressing concerns on the slowing growth in the economy.

The role of an entrepreneur in an economy cannot be emphasised enough. It is their ability to allocate capital and their foresight that ultimately drives much of the economy. Little wonder, a successful economy and flourishing of entrepreneurs tend to go hand in hand. With India, one part of the equation is all but proved. But are entrepreneurs also flourishing in equal measure? The Economist has tried to answer the million dollar question of who exactly will be the next Infosys or the next Wipro for that matter and has come away with rather mixed feelings. On the one hand, the country has been notorious for its inefficient bureaucracy and the hassles that a prospective entrepreneur has to go through in starting a business. At the same time though, entrepreneurship does seem to be mushrooming in select pockets rather well. We don't know for sure which way the pendulum will swing in the coming decades. But as the magazine points out, for the sake of the growth of Indian economy, it is of utmost importance that a few hundred entrepreneurs or may be even more, bloom in the country.

Tight monetary policies have raised the cost of debt for Asian companies in domestic markets. As a result, these companies are looking out for borrowing options abroad to fund their expansion plans. However, it seems that the cheap overseas liquidity doors for these companies may well be closed. Due to a general confidence crisis abroad, investment houses are facing redemption pressures on Asian bonds. Secondly, foreign banks are facing liquidity crunch thus having difficulty in lending to Asian companies. Further, shortage of dollar deposits, especially with European banks, has also raised the cost of funding which will ultimately be passed on to the customers. This has raised a concern that for the want of financing, economic growth in Asia is likely to suffer.

However, we believe it is too early to take a call on this issue. It may be noted that majority of the Asian companies have huge piles of cash sitting on their balance sheet. Further, companies are also delaying their expansion plans where debt is expected to be used as a source of finance. While this may hurt growth in the near term, the situation is not that grim on the liquidity front as it appears to be. But it can be said that the interest rate benefit arising from borrowing abroad has definitely narrowed down to a certain extent.

Over the past couple of decades, the Chinese economy has grown at a breathtaking pace. However, going forward, a certain factor is going to prove to be a big challenge for China. We're talking about demography- the composition of population. China's one-child policy, which was introduced back in 1979, has now started worrying economists, sociologists and demographers. China is the only developing country in the world which will have an aging population before it gets rich enough. Over the next five years, the percentage of its population above the age of 60 will increase from current 13.3% to 16% of the total population as per certain estimates. Moreover, by 2050, about 25% of the Chinese population is estimated to be above the age of 65, which is currently about 9%. About 50% of the country's present population above 60 years lives alone.

The most important factor in any economy is the human capital. As the working population ages, the number of dependents will grow at a much faster rate than the bread-earners. How China deals with this situation remains to be seen.

Meanwhile, the Indian stock markets exhibited volatility in today's trading session as they oscillated to either side of yesterday's close. At the time of writing, the benchmark BSE Sensex was up by 26 points. While banking stocks were at the receiving end, IT stocks led the pack of gainers. Asian stock markets were trading mixed with China registering gains, while Japan was trading in the red.

 Today's investing mantra
"Determine value apart from price; progress apart from activity; wealth apart from size." - Charlie Munger

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12 Responses to "This three decade old crisis may cripple India Inc."


Oct 25, 2011

More than the labour laws, what really needs a MAJOR change is the money-mongering labour-brokers masquerading a trade union leaders. They destroy the industry and subsequently the careers of millions good workers to meet their selfish political and more importantly personal gains !



Oct 25, 2011

Yes, labour laws need to be revised; but we also cannot have the pendulum swing from over protection of labour to no protection, it has to be equitable for both sides. Equally important is depoliticisation of labour - I have seen so much of it in nearly 4 decades in industry, how poor workers are taken for a royal ride by their netas because of the latters own agendas and egos.

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