Setting the right price
The current issue of BusinessWorld is centered around the India’s cost of growth and the article “The Price of Growth” by Rajeev Dubey made a very interesting read (you can read it HERE). Some key points that he highlights are:
Corporate India’s interest expense has increased by ~ 29% in Jan-Mar 2008 which is fastest in the past 10 quarters and compares starkly with the range of 2 to 7% in the western hemisphere and the salaries and wages have increased 22% (the second highest in past 10 quarters) leading to lowest net profit margins in the period under consideration;
HR costs are increasing 15-20% every year against global average of 2-5%. I was surprised to know that Rahul Dhir, CEO of Carin India earns Rs.7 crores given the Rs.34 crores size of his company! (i guess he is either very confident of his company’s prospects or has given up - if the former, I should be going long on Cairn - LOL)
People efficiency (note that this is not labor efficiency – so it should include, I guess, white collar jobs too) is around 50-60% against global average of 80-90%;
Estate prices for businesses have always been high in India’s Mumbai against better locations with better living standards;
Three years back, a cement plant cost $60 per ton while today it takes $120 per ton to build it;
There are many other such instances that have been cited which are known. Though the report/article does not delve into great depths, it cites regulatory hurdles in land acquisition and setting up power projects as the main reasons that have led India to become a costly place for business and may in the medium term endanger the flows of FDI and GDP growth.
While I agree on the preliminary couple of reasons given for increased costs, I believe that the cause and solution is available in the economics textbooks. We know how the costs behave under the economies of scale. We know the relationship between Average costs(fixed, variable and total) and Marginal costs and that is what is making India costly and threatening its growth.
Beyond a point, both average variable costs and marginal costs start increasing while the average fixed costs tend to remain more or less constant and that is what has happened - we have reached that critical point in production where the costs start increasing. Now, if we want to remain low cost in comparison to our competing countries we need to move this point further away from the origin.
And how can we do that? By making sure that growth is not concentrated in the four metros and another 4/5 metropolitan cities. If we can have over a dozen cities where a business can look to set up its plant/office, we will surely move the point of inflexion further away and make sure that cost reversal takes place at later stages. I wish each state to have atleast one city on the lines of Mumbai/Delhi/Chennai/Kolkatta and each state bigger than Gujarat to have two such cities. A healthy competition among the states would make sure that the inflexion point is driven farther and farther and as a whole India remains one of the most competitive advantageous countries for any business in the world. This would need India to adopt a more federal nature of governance and would also fit well with Porter’s Diamond for the Competitive Advantage of Nations.
While we ponder this, here a nice video:
