ECONOMY
The Price Of Growth
India is slowly becoming a high-cost economy, which translates into falling competitiveness, job losses and industrial emigration.
RAJEEV DUBEY
11 July 2008
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| BLOW TO BUSINESS: Rising input costs, specially that of labour and power, coupled with shifting political alliances have made India an expensive business destination |
Nine years in the US made Thomas John a successful entrepreneur in Infotech. But a dream and an idea brought him back to Chennai. Four months ago, his company, OOHA Services, rolled out the first of the 50-100 free internet kiosks it plans in the city. “Our revenues would come from selling advertising against the eyeballs,” says John. “I thought India is a developing country and it requires internet.”
But within two months of launch, the economics of his business went haywire. While he paid Rs 5,000 a month as rent for the first kiosk, he now has to shell out Rs 15,000 for the same space. He hired a software engineer for Rs 40,000 per month; today he can’t find one for Rs 80,000 per month. “Sometimes, I feel I can’t do business in India,” says a shocked John. “It’s too expensive. Right now we’re only burning cash. It’s very difficult, nearly impossible, for a start-up to take off. If costs escalate any further, I’ll have to recalculate everything.”
Start-ups as small as John’s and even established businesses as large as Reliance Industries are realising that even though India has for long been positioned as a low-cost destination, it is actually a high-cost economy. Several components of the cost of doing business here — such as spiralling wages, poor economies of scale, lack of infrastructure, high tax regimes and administrative corruption — have become too exorbitant to keep India competitive.
High-Cost Economy
In the worst case scenario, high-cost economies cause industrial migration, even services migration. Businesses today are so global — Dell, for instance, sources components from 35 countries and Boeing aircraft are put together with assemblies from 72 countries — and complex that uncompetitive economies force en masse emigration of businesses, human resources and capital, leaving trails of despair, unemployment and run-down factories in ghost towns.
For instance, semiconductors were invented in the US in the late 1950s, but Taiwan took over nearly the entire global market by the end of the 1980s. Now, China has outscaled, outpriced and outsmarted Taiwan, causing another migration of the semiconductor business.
In the past, the centre of gravity of the global textile business has shifted from the US and Europe to Asia, particularly China, Sri Lanka and India. And right now, China is overtaking South Africa as the world’s largest gold producer. Though the US is still the centre of the global automotive industry, Detroit, the Mecca, is losing out as large-scale manufacturing has shifted to Japan and Korea. Now, China and India are set to overtake them. Detroit’s population has halved to under 1 million since 1950 when it was the fourth largest city in the US. Today, it is not even among the 10 largest cities.
India has lessons to learn from such instances. “It is easier to do business abroad,” Tata Group Chairman Ratan Tata told BW in an interview in December. “Companies going abroad for business will hurt India’s development.”
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EMIGRATION BLUES: Detroit, once the Mecca
of the automotive industry, had lost out when
manufacturing shifted to Japan and Korea
(Reuters) |
That may sound preposterous in these nascent years of India’s economic renaissance, but there is evidence to suggest that Tata’s fears aren’t unfounded. The unprecedented growth in the economy has led to a spectacular rise in the costs. Corporate India’s interest expenses have risen 28.74 per cent in the Jan-March 2008 quarter — the fastest in the past 10 quarters, according to the Centre for Monitoring Indian Economy (CMIE) (see graph ‘Rising Costs’ on page 31). The West’s average is 2-7 per cent. Profit after tax as a percentage of income was among the lowest in the past 10 quarters, indicating a squeeze on margins. Salaries and wages have risen 22.44 per cent, the second highest in the past 10 quarters, while power and fuel costs are growing at a fast clip of 14 per cent. “India’s cost-competitiveness has eroded,” says Sanjay Verma, managing director of real estate consulting firm Cushman & Wakefield India. “India will lose out if it doesn’t offer anything other than a cost advantage.”
Citi’s India Equity Strategy report of May 2008 says an analysis of the rising costs of setting up business over the past three years — asset, capital and services based — suggests ‘business inflation’ could be as high as 10-35 per cent a year, well ahead of 7-8 per cent headline inflation. “It has become expensive to live in India but probably even more expensive to do business in India,” says the report.
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