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Terms like automation and productivity are now common in corporate India. Companies want to squeeze out the maximum growth, with the minimum resources. This trend has been around for a while now. Ever since the boom years of growth (2003 to 2008) ended, profit margins have been under pressure.
Corporates have responded by cutting costs. But this can be taken only so far. Some have been selling off their non-core assets. But this too has its limits. The only long-term solution is to increase productivity i.e. doing more with less.
In this regard India’s IT sector is way ahead of the manufacturing sector. Consider these trends as reported in the Business Standard. Revenue per employee for IT firms has grown at 9% annually over the last five years. This is faster than the 8.4% annual growth in salary costs.
But you will find the opposite scenario playing out in manufacturing firms. Employee costs have grown at 17.2% in the past five years. On the other hand, sales have grown at only 14.1% during the same period.
Manufacturing firms have been able to pay higher wages recently due to the fall in commodity prices. However, this too is not likely to sustain. When commodity prices start to increase again, the trend toward productivity will begin in earnest.
We believe this is a long-term inevitable trend. India’s labour productivity has been abysmal historically. In fact it has been falling recently. According to a study by India Ratings, the average labour productivity growth in India fell to 3.84% during FY11-FY15 from a high growth of 9% during the boom years of FY05-FY08. This has largely cancelled out the benefits of falling commodity prices.
We believe rising productivity will be a major long-term driver of the Indian economy. There is no getting around it. If India has to reach its full potential, productivity and not only job creation will be the key megatrend to watch out for.
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