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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