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A M Naik, chairman of India's premier engineering firm Larsen & Toubro, has been arguing for some time that salary levels in India have reached the point where it is cheaper to hire a CEO abroad. The company, which is looking for chief executives for a couple of its new business verticals, has appointed a global search firm and Mr Naik is willing to pay the going price for an imported chief executive. For, business is booming and L&T needs to fill its critical positions fast. The rising attrition rate has also forced the company to give extensions to quite a few of its retiring employees. And, a couple of years back, Mr Naik introduced stock options and fast-track promotions, which were relatively new ideas in the then staid manufacturing sector. L&T is just one example of how India's "old economy" companies are pulling out all the stops to attract and retain talent.

So Watson Wyatt's projection that this year manufacturing companies are expected to offer salary increases of 16 per cent, a percentage point more than the increase expected from information technology companies, is only to be expected. After all, Indian manufacturing has registered double-digit growth rates for the better part of this decade and now has to play by the rules of rapid growth. Also, the entry of multinationals has ensured that Indian industry cannot compete on costs alone, and has to make innovation the core of its competitive strength "" which means retaining inspired designers, engineers and managers. So the fast-growing manufacturing sector has no option but to join the war for talent by offering sign-on bonuses, retention bonuses, overseas assignments ... all the weapons in the armoury of the software giants.

These have become affordable in part because increased automation and better efficiency have brought down the ratio of employee cost to sales in the manufacturing sector. Steel companies, for instance, spent over 11 per cent of sales on employees in 1992; this has dropped to less than 8 per cent. But in a scenario where currency movements are squeezing margins, the issue is what this might mean for the long-term competitiveness of India's manufacturing sector, which has gained real momentum in only the past couple of years. One worry point is that the talent shortage is likely to get worse before it gets better, because there is no supply side response to the growing scarcities. The education system is not churning out enough people with professional skills, and standards vary sharply. Thus, transferable competencies will always be at a premium, unless India's education system is overhauled.

At another level, there is the issue of gold-collar employees walking away with the cream and creating sharper differences between entry-level salaries and the pay packets of senior employees. The good news here is that job creation itself is improving. Industry chamber Ficci says one million new jobs will be created in the textiles sector over the next few years, with a projected investment of over Rs 90,000 crore. McKinsey, the consulting firm, estimates that India's factories will need 73 million workers by 2015, which it estimates at being 50 per cent more than the number today. What this means is that, even for semi-skilled jobs such as refrigeration mechanics and fitters, there is a shortage of as much as 65 per cent. In fact, 80 per cent of CEOs polled feel that the shortage of qualified people will be a major constraint on Indian business over the coming five years. In that scenario, rapid salary increases are virtually guaranteed.