Hi Friends,

Even as I launch this today ( my 80th Birthday ), I realize that there is yet so much to say and do.

There is just no time to look back, no time to wonder,"Will anyone read these pages?"

With regards,
Hemen Parekh
27 June 2013

Sunday, 3 July 2016

How to break the Vicious Circle ?

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 !


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04  July   2016

www.hemenparekh.in / blogs

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