Labour loses in boom market

India Inc's labour cost, as a % of total production cost, has been going down steadily.

The salaries of India's managers may be moving up rapidly, with salary surveys reporting the highest pay hikes for Indian executives in the Asia- Pacific region.

But Indian companies have managed to square the circle: India Inc's labour cost, as a percentage of total production cost, has been going down steadily, reaching 8.13 per cent in 2004-05, compared with 9.54 per cent in 2000-01.

This saving of 1.41 per cent of total cost gave the corporate sector a gain of Rs 17,284 crore in 2004-05, and accounted for 53.9 per cent of the increase in profit in that year. 
 

LABOUR COST AS % OF PRODUCTION COST
Year	All companies	Public sector	Private sector
2000-01	9.54	10.59	8.88
2001-02	9.44	10.41	8.49
2002-03	9.14	9.66	8.73
2003-04	8.88	9.19	8.64
2004-05	8.13	8.09	8.15
Total 3,338 firms (3,197 private and 141 PSUs)

Interestingly, operating profit margins did not show any improvement during this period, moving from 24.48 per cent of sales in 2000-01 to 24.26 per cent in 2004-05. In other words, there were no cost savings other than on labour during this period.

This study covers 3,338 companies for which financial information for the last five years is available from a database, Capitaline Plus. Labour cost includes salaries, wages and bonus, staff welfare expenses, gratuity and other employee costs, but excludes voluntary retirement compensation.

The decline in the share of labour cost in the total cost of production is largely on account of corporate sales growing rapidly, while fresh hiring has been kept to a minimum. It does not, therefore, seem to represent stagnation in individual salaries.

Thus, while net sales growth moved up from 7.10 per cent in 2001-02 to 22.95 per cent in 2004-05, the growth in labour cost remained in single digits through almost that entire period, finally clocking a 10.5 per cent increase in 2004-05.

The most striking reason for this was the lack of fresh employment in the manufacturing sector""in other words, manufacturing companies have grown their businesses without adding to employee numbers. This could suggest the existence of flab in the early years.

For manufacturing firms in the private sector, the share of labour in the total cost of production declined from 7.52 per cent in 2000-01 to 6.04 per cent in 2004-05. The labour cost for public sector companies declined from 5.26 per cent to 3.95 per cent.

In contrast, labour cost has gone up substantially in service sector industries where new employment has been generated (and where the employment market has been heated).

For example, the labour cost in the booming information technology sector moved up from 29.38 per cent of total cost in 2000-01 to 45.29 per cent in 2004-05.

In the banking and finance sector, which has seen a drive for greater productivity and improved bottom lines, the share of labour cost declined from 41.79 per cent in 2000-01 to 34.81 per cent in 2004-05.