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‘Wage Inflation Could...'

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(Pic by Tribhuwan Sharma)

All of a sudden, the cruising Indian economy is facing serious challenges on several fronts. The man on the street has been badly bruised by inflation crossing the 7 per cent mark, with sharp price rises in basic commodities such as food, petroleum products, cement and steel. Industry is battling with cost increases and wage bill inflation, and policy makers are struggling to find solutions. Put in global shortages in goods and services, and a volatile rupee, and you have a heady mix. As the new president of the Confederation of Indian Industry (he took charge on 1 May), Kundapur Vaman Kamath is responsible for steering the course of industry, taking stock of its concerns and articulating them to the government. Kamath, India’s best known banker (he is CEO & managing director of ICICI Bank), speaks to BW’s Vatsala Kamat on the challenges facing the economy, and the possible solutions. Excerpts:

Q:Inflation has come as a rude shock. Will we see any moderation?
A:There is a clear realisation that 7 per cent is the average inflation rate in developing countries. Economy and industry have to work within that overriding constraint. Inflation in commodities such as oil, food, key metals and minerals is now a global phenomenon. The government will have to take topical solutions — monitor global price trends of key commodities and take appropriate measures if domestic price behaviour is completely out of sync. It is being done. In steel and cement the government is ready with a series of administrative measures. This will set right market parameters over a period of time. Industry should invest in building capacities, robust processes and technology to meet future demand.

Is global inflation triggered by easy money in emerging markets?
Clearly, there is global inflation. You could then have easy money fuelling that. But in our case, the impact of easy money is largely contained. Easy money is the culprit if you notice runaway growth in the transportation equipment market, property market and speculation. But in the past one year, growth in consumer credit is down to single digits. A series of measures such as hike in interest rates have cooled down these markets.

What is your view on our foreign exchange rate?
We could see 5 per cent appreciation in the rupee over the next 3-4 years.

How will the Indian industry compete in global markets with a stronger rupee?
We have to live with currency movements. Industrial efficiency is the factor of several variables: scale — the Indian industry has it now; access to technology — we have got our acts together; skill sets of people — industry is trying to put them in place; R&D capability — Indian companies are weak here and must consciously work towards this. This can happen quickly through overseas acquisitions.

Despite inflationary pressures and CRR hikes, retail interest rates seem stable...
Global signals point to comfortable interest rates. We cannot be out of sync with the world. If we hike rates, we will have issues of money flows into the country. Of course, bank rates on deposits are marginally higher than inflation. But that’s the result of demand and supply.

Is India becoming a high-cost economy? Will this put off foreign companies?
The inherent advantages of doing business in India remain intact. It is not just about cost arbitrage but about the availability of talent, an English-speaking workforce and a large pool of human capital. From being a supplier of low-end skills, we are now in various segments of the value chain. And (we have) a large, growing market. So, foreign business will keep coming to India. But, wage inflation is an issue for all businesses in India, whether Indian or foreign-owned. We have seen 12-15 per cent wage inflation for the past three years across sectors. This means doubling wages every sixth year.

How do you think we can get around the problem?
At present, you are paying for shortage. Wages are inflated to avoid attrition and everyone is doing this. It’s a zero sum game. We are looking at 10 million jobs per year for the next five years. Two million are white and blue collared jobs where our system is geared to deliver the right candidates. The other eight million are those which, in the western context, are called ‘guild skills’, like floor attendants in a retail store, drivers, lift operators, and so on. A conscious joint effort by corporates, educational institutions and the government will help increase this pool. This in turn, will improve skill levels and efficiency, rationalise wages, contain attrition and bring down runaway cost increases.

The index of industrial production signals an economic slowdown...
Fundamental factors driving growth remain favourable — the demographics, a growing middle class, a robust knowledge economy, a rapidly growing services sector, strong investment and consumption outlook. There may be cyclical downturns driven by external factors or short-term disruptions in domestic conditions. But the current level of 8 per cent-plus growth is sustainable.

Farm subsidies and loan waivers have sparked debates on fiscal health...
Our agricultural subsidies are a fraction of those in the West. As a democracy, we must help some sections of the society. The debate is on how it is meted out. The best way is to reach the masses directly. But I am in favour of appropriate user charges — a person who can pay for food should not be given ration. Loan waivers, too, carry the risk of bringing in the culture of non-repayment of loans.

(Businessworld Issue 3-9 June 2008)


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