After recent announcement of 7th Pay Commission recommendations , there were many debates and " Expert Interviews " on TV channels
When asked :
" Will placing of Rs 1 lakh*crore into the pockets of government employees , push up the prices of all kinds of products ? " ,
experts ( including Shri Jaitleyji ) agreed that there is a good chance that the prices may go up by 1.5% to 2%
Of course , the common man has known this for ages !
Every time he got Diwali bonus or annual salary increment , the prices in shops invariably went up !
It was , as if the Shopkeepers ( and the Manufacturers too ) , were just waiting for these announcements
Of course , when product prices go up , the CPI goes up
In turn , the CPI linked wages / salaries go up , raising the cost of manufacture
It is a vicious circle of prices chasing the salaries / wages !
Now take a look at any " product " in your house ( Consumable or Durable )
And ask :
" How much of its manufacturing cost is Manpower Cost ( wages / salaries paid to the people engaged in manufacturing it ) ?
For most " products " ,
# Salaries and wages would range from 10 % to 30 %
# Overheads of approx 30 % ( once again,mostly comprising salaries / wages )
# Raw Material + Bought Out Component would cost ( 40 % - 60 % )
And it is the same break-up ( of cost ) for the company which supplied that raw material or that component
This Cost Structure repeats again and again , as you continue to " drill down " the entire " Supply Chain " !
Not surprising , if you consider that eventually , everything that we see around us ( in the form of products ) , comes out of Mother Earth - and FREE !
World has no material cost !
At each stage of processing ( from digging out that earth or cutting down that tree ) , all that adds " value " is nothing more than the wages / salaries of people who added that " value " and increased its usefulness
Now , you get the big picture
If , somehow , those salaries / wages remained " low " at each stage of processing / manufacturing , then the final product would come out " Cheap "
And lesser product cost would lead to a lower selling price and consequently , a smaller increase in CPI
Smaller increase ( or no increase ? ) in CPI , would mean smaller ( or no ) rise in CPI-linked wages / salaries
No problem !
People would need to earn lesser wages / salaries , to buy that product !
There will be less demand to raise those salaries !
But , question is :
How can we ,
* break the " Vicious Circle " ( of ever rising product-prices chasing rises in
wages / salaries ) , and
* turn it into a " Virtuous Circle " ( of ever decreasing cost of manufacturing
leading to lower selling prices , leading to lower CPI rise , leading to lower
demand for salaries / wages ) ?
Can we learn something from the following lessons ?
In 1986 , inflation ( price rise / CPI etc ) , climbed to 9.2 % in Australia , forcing PM , Bob Hawke to tell his countrymen :
" We have , for the time being , to accept reduced Standard of Living , and permanently , increased Standard of Effort "
Then he went on to :
# Limit workers wage-increases to around 2.3 % per year
# Appealed to Directors / Senior Managers , not to raise their own salaries
# Reduce Public Services ( Government owned / operated services )
In same year , PM Lee of Singapore was facing 0 % growth in GDP !
So , he ordered one year WAGE FREEZE for all employees ( government as well as private sector )
Despite the fact that in 1986 , Singapore ( with a population of just 4 million ) , exceeded India's exports of approx $ 9 billion(with a population of 800 million !)
Why was Lee worried so much ?
Having no natural resources ( that can be dug out of earth ) , Singapore's entire " Value Addition " consisted of salaries / wages of its citizens !
He could not afford to let Singapore become a " High Cost Economy "
Right now , many European countries are trying to copy PM Lee - albeit in a very diluted way - by introducing " Austerity Measures / Labor Reforms ", in their high cost economies
Governments of these countries are telling their citizens :
" We have been living beyond our means and spending far more than we earn.
To maintain our high Standard of Living , we have borrowed heavily from
everyone , raising our external debt to several times our GDP
With our high cost economy ( welfare nation ) , our product costs are so high
that no one wants to buy these and our exports are shrinking !
We are even forced to sell our infrastructure assets and companies to the
Chinese ! "
And with rapidly rising wages , even the Chinese are getting worried !
Chinese manufacturers ( government + private ) are going all out to replace high paid workers with robots ! Some 65,000 robots in 2015 alone - nearly 85 % of all the robots installed world-wide !
Now of course , freezing wages / salaries across the board cannot be the answer for India to avoid becoming a High Cost Economy
But that does not mean we cannot try some " Out of the Box " innovations such as :
# Wages / Salaries
Assuming that A-B-C Analysis ( 10 % at the top / 80 % in the middle / 10 %
at bottom of the pyramid ) holds good for the our country's wage-bill as a
whole , it would follow that the TOP 10 % ( of the working class ) , take away
90 % of wages / salaries of the entire country ( mostly in private sector )
If they accept a 10 % cut in their salaries / wages for one year , that would
lead to , 9 % reduction in costs !
Let us reward companies adopting this salary-cuts with 2 % reduction in
their Corporate Income Tax - a very powerful motivation !
# For those the middle 80% of the working population , abolish Personal
Tax , with the condition of NO wage increases ( increments + bonuses ) , for
2 years ( this will effectively increase their take-home pay by 10 % per
year , allowing them to maintain their standard of living , without pressing
for higher wages and running to labour unions ! )
# For the bottom 90 % of the people ( taking just 10 % of the total wage bill ),
let us implement the just framed proposals of the Labour Ministry , for
raising their minimum wages in 45 economic activities covered by the
Minimum Wages Act , 1948 . Also , exempt them from Personal Income Tax
Unless we act fast to reduce our " Wage / Salary " bill , following consequences
are inevitable :
# Our products will become noncompetitive in the export market , which has
been continuously shrinking for the past 18 months
# Instead of exporting " finished products " , we will end up exporting our Raw
Materials to " Low Wage Cost " economies , for processing / value-addition
# More and more Indian Manufacturers will switch over to automation through
wide spread installation of Robots , eliminating high wage workers
# Our goal of raising share of manufacturing in our GDP from 16 % to 25 % ,
will not materialize
I believe , we must stop getting caught up in some " Ideological " debate , just
because we are a Democracy and cannot act like China
If my suggestion is implemented ( with whatever modifications considered
necessary ) within the next 12 months , we still have a fighting chance to keep
ours , a " Low Cost Economy " and avoid the fate of those developed countries
which are realizing their mistakes , 30 years too late !
----------------------------------------------------------------------------------------
04 July 2016
www.hemenparekh.in / blogs
----------------------------------------------------------------------------------------
When asked :
" Will placing of Rs 1 lakh*crore into the pockets of government employees , push up the prices of all kinds of products ? " ,
experts ( including Shri Jaitleyji ) agreed that there is a good chance that the prices may go up by 1.5% to 2%
Of course , the common man has known this for ages !
Every time he got Diwali bonus or annual salary increment , the prices in shops invariably went up !
It was , as if the Shopkeepers ( and the Manufacturers too ) , were just waiting for these announcements
Of course , when product prices go up , the CPI goes up
In turn , the CPI linked wages / salaries go up , raising the cost of manufacture
It is a vicious circle of prices chasing the salaries / wages !
Now take a look at any " product " in your house ( Consumable or Durable )
And ask :
" How much of its manufacturing cost is Manpower Cost ( wages / salaries paid to the people engaged in manufacturing it ) ?
For most " products " ,
# Salaries and wages would range from 10 % to 30 %
# Overheads of approx 30 % ( once again,mostly comprising salaries / wages )
# Raw Material + Bought Out Component would cost ( 40 % - 60 % )
And it is the same break-up ( of cost ) for the company which supplied that raw material or that component
This Cost Structure repeats again and again , as you continue to " drill down " the entire " Supply Chain " !
Not surprising , if you consider that eventually , everything that we see around us ( in the form of products ) , comes out of Mother Earth - and FREE !
World has no material cost !
At each stage of processing ( from digging out that earth or cutting down that tree ) , all that adds " value " is nothing more than the wages / salaries of people who added that " value " and increased its usefulness
Now , you get the big picture
If , somehow , those salaries / wages remained " low " at each stage of processing / manufacturing , then the final product would come out " Cheap "
And lesser product cost would lead to a lower selling price and consequently , a smaller increase in CPI
Smaller increase ( or no increase ? ) in CPI , would mean smaller ( or no ) rise in CPI-linked wages / salaries
No problem !
There will be less demand to raise those salaries !
But , question is :
How can we ,
* break the " Vicious Circle " ( of ever rising product-prices chasing rises in
wages / salaries ) , and
* turn it into a " Virtuous Circle " ( of ever decreasing cost of manufacturing
leading to lower selling prices , leading to lower CPI rise , leading to lower
demand for salaries / wages ) ?
Can we learn something from the following lessons ?
In 1986 , inflation ( price rise / CPI etc ) , climbed to 9.2 % in Australia , forcing PM , Bob Hawke to tell his countrymen :
" We have , for the time being , to accept reduced Standard of Living , and permanently , increased Standard of Effort "
Then he went on to :
# Limit workers wage-increases to around 2.3 % per year
# Appealed to Directors / Senior Managers , not to raise their own salaries
# Reduce Public Services ( Government owned / operated services )
In same year , PM Lee of Singapore was facing 0 % growth in GDP !
So , he ordered one year WAGE FREEZE for all employees ( government as well as private sector )
Despite the fact that in 1986 , Singapore ( with a population of just 4 million ) , exceeded India's exports of approx $ 9 billion(with a population of 800 million !)
Why was Lee worried so much ?
Having no natural resources ( that can be dug out of earth ) , Singapore's entire " Value Addition " consisted of salaries / wages of its citizens !
He could not afford to let Singapore become a " High Cost Economy "
Right now , many European countries are trying to copy PM Lee - albeit in a very diluted way - by introducing " Austerity Measures / Labor Reforms ", in their high cost economies
Governments of these countries are telling their citizens :
" We have been living beyond our means and spending far more than we earn.
To maintain our high Standard of Living , we have borrowed heavily from
everyone , raising our external debt to several times our GDP
With our high cost economy ( welfare nation ) , our product costs are so high
that no one wants to buy these and our exports are shrinking !
We are even forced to sell our infrastructure assets and companies to the
Chinese ! "
And with rapidly rising wages , even the Chinese are getting worried !
Chinese manufacturers ( government + private ) are going all out to replace high paid workers with robots ! Some 65,000 robots in 2015 alone - nearly 85 % of all the robots installed world-wide !
Now of course , freezing wages / salaries across the board cannot be the answer for India to avoid becoming a High Cost Economy
But that does not mean we cannot try some " Out of the Box " innovations such as :
# Wages / Salaries
Assuming that A-B-C Analysis ( 10 % at the top / 80 % in the middle / 10 %
at bottom of the pyramid ) holds good for the our country's wage-bill as a
whole , it would follow that the TOP 10 % ( of the working class ) , take away
90 % of wages / salaries of the entire country ( mostly in private sector )
If they accept a 10 % cut in their salaries / wages for one year , that would
lead to , 9 % reduction in costs !
Let us reward companies adopting this salary-cuts with 2 % reduction in
their Corporate Income Tax - a very powerful motivation !
# For those the middle 80% of the working population , abolish Personal
Tax , with the condition of NO wage increases ( increments + bonuses ) , for
2 years ( this will effectively increase their take-home pay by 10 % per
year , allowing them to maintain their standard of living , without pressing
for higher wages and running to labour unions ! )
# For the bottom 90 % of the people ( taking just 10 % of the total wage bill ),
let us implement the just framed proposals of the Labour Ministry , for
raising their minimum wages in 45 economic activities covered by the
Minimum Wages Act , 1948 . Also , exempt them from Personal Income Tax
Unless we act fast to reduce our " Wage / Salary " bill , following consequences
are inevitable :
# Our products will become noncompetitive in the export market , which has
been continuously shrinking for the past 18 months
# Instead of exporting " finished products " , we will end up exporting our Raw
Materials to " Low Wage Cost " economies , for processing / value-addition
# More and more Indian Manufacturers will switch over to automation through
wide spread installation of Robots , eliminating high wage workers
# Our goal of raising share of manufacturing in our GDP from 16 % to 25 % ,
will not materialize
I believe , we must stop getting caught up in some " Ideological " debate , just
because we are a Democracy and cannot act like China
If my suggestion is implemented ( with whatever modifications considered
necessary ) within the next 12 months , we still have a fighting chance to keep
ours , a " Low Cost Economy " and avoid the fate of those developed countries
which are realizing their mistakes , 30 years too late !
----------------------------------------------------------------------------------------
04 July 2016
www.hemenparekh.in / blogs
----------------------------------------------------------------------------------------
Make
Yourself Heard
Dear Visitor :
It is time for YOU to speak up - and demand that YOU
are heard
By emailing this suggestion - incorporating your OWN
improvements - to the following Policy Makers
( Just multiple
copy all the following Email IDs into the Recipient column of your Outlook and
Copy / paste this suggestion in the Message Box ) :
narendramodi1234@gmail.com;
38ashokroad@gmail.com;ajaitley@del5.vsnl.net.in;
jayant.sinha19@sansad.nic.in;piyush.goyal@gov.in;nitin.gadkari@nic.in;
spprabhu1@rediffmail.com;bandaru@sansad.nic.in;smritizirani@nic.in;nsitharaman@nic.in;
ravis@sansad.nic.in;sureshprabhu@irctc.co.in;prakash.j@sansad.nic.in;secy-ipp@nic.in;
amitabh.kant@nic.in; shaktikanta.das@nic.in; rsecy@nic.in; adhia1981@gmail.com;
ceo-niti@nic.in; atul-chaturvedi@nic.in; uma.bharati@sansad.nic.in;
d.pradhan@sansad.nic.in; rprudy.office@gmail.com; rudypr@rediffmail.com;
eam@mea.gov.in; mosvks@mea.gov.in; mvnaidu@sansad.nic.in; mnaqvi@sansad.nic.in;
rao.inderjit@sansad.nic.in; mljoffice@gov.in; sadananda.gowda@sansad.nic.in;
ministerminority@gov.in; najmah@sansad.nic.in; minister-ca@nic.in;
ramvilas.paswan@sansad.nic.in; gandhim@sansad.nic.in;
akumar-alpha@sansad.nic.in; jpnadda@sansad.nic.in; hm.moca@nic.in;
geete@sansad.nic.in; simratbadal@yahoo.com; ns.tomar@nic.in;
rmsingh@sansad.nic.in; tc.gehlot@sansad.nic.in;
dr.harshvardhan@sansad.nic.in
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