Arvind Singhal: Growing in an inflationary situation

MARKETMIND

In statistical terms, inflation in India has nudged down this week to a more acceptable below 6 per cent level. Hence, my essay on the subject of inflation may seem out of context at this time.

However, I still believe that there are many trends that, if not taken cognizance of, could cast a shadow on the growth prospects of many industries and in turn have an impact on the overall growth of the economy.

In recent years, the major growth drivers for the Indian economy include sectors such as IT and ITES, automobiles and auto components, telecom products and services, construction""both infrastructural as well as commercial and residential, textile and clothing (exports), and a host of other manufacturing industries including engineering and pharmaceuticals.

As a result, at least urban employment has seen an upswing, and with that, consumer spending has had a fillip.

These good times, however, are threatened by a wide range of potentially inflationary trends. For the services sector, the most serious one pertains to the wage spiral it has got into, with diminishing scope for productivity improvement in the near term.

I had referred to this, briefly, in my last column and would now like to expand on this subject a bit more.

The genesis of this problem lies in poor business infrastructure development in most parts of India barring a few isolated islands of (relative) excellence such as Bangalore, Delhi/Gurgaon/Noida, Mumbai, Hyderabad, Chennai, and perhaps Pune and Chandigarh.

A rapid growth of services such as IT and ITES, telecommunication, and retail/leisure in such few locations has led to pressures on the availability of educated young talent.

Migration from smaller towns and cities has not really alleviated the situation since increased population in the metros and mini-metros has made the living costs go up rapidly, creating further pressure on wages and salaries.

Unfortunately, this is creating an urban wage spiral across the board for other industries as well including the small- and medium-scale manufacturing ones that are currently located in the metros and mini-metros.

For other industries, the inflationary pressures are on account of many other factors that could include higher input costs such as energy, steel and aluminum, sugar, and petrochemical derivates, including plastics.

Lack of urban land reforms, coupled with the hype created by the builder-community and relentless price escalations, has significantly raised the prices of commercial and residential property in most of the major cities that are currently the hub of commercial activity, adding to the overall cost of doing business and also diverting a larger proportion of consumer incomes into housing.

Manufacturers are, therefore, under pressure to neutralise some of these higher input costs by raising prices. There are frequent reports in media these days about impending price hikes from a slew of companies across diverse sectors such as automobiles, consumer durables, and FMCG.

However, this could be suicidal and could lead the consumer spending to a sputtering slowdown, leading to a cascading effect across the economy.

Hence, solutions have to be found by focusing beyond cutting operating costs in a conventional manner. There is no generalised solution for all sectors.

However, in many cases, a reengineering of the entire manufacturing and marketing supply chain is probably still feasible.

This would not only imply a modernisation and induction of state-of-the-art technology for eking out better production efficiencies, but also working more closely with their vendors to see how they can become more productive and quick responsive.

Automobile companies, for long, have worked on this principle and it is no wonder that the Indian auto manufacturing sector has seen remarkable productivity gains in recent years.

A similar approach is now needed across some of the more basic consumer goods sectors such as textiles and clothing, food and grocery, and personal care products with sharing/collaboratively developing or acquiring new know-how to improve productivity.

In the consumer durables category, manufacturers have started to "upgrade" products with more features""in the quest to make consumers spend more money.

An alternative strategy could be to actually strip many current products with non-essential features and thereby drive prices lower so that consumer spending continues to increase.

Tata Motors is trying to produce a very basic Rs 1 lakh car. It may or may not succeed, but the philosophy and the objective behind this radical effort have to be lauded and emulated.

On the services side, IT/ITES businesses should explore entering into strategic partnerships with educational and training institutions""both public and private""to set up many more such institutes in relatively small towns across India, and then these businesses should take the courageous step of moving to those smaller towns that can provide educated/trained manpower at more competitive costs.

The arrival of low-cost airlines in the country is fortuitous, and perhaps IT & ITES majors should work closely with Air Deccan and the likely other new entrants to put many more of these smaller towns on their map so that better air transportation connectivity can be achieved.

Obtaining high-quality telecommunication connectivity even in small, relatively remote towns should no longer be an issue in India.

I would like to close this argument by taking an excerpt from Peter Drucker's Managing in Turbulent Times.

He writes that "in turbulent times, an enterprise has to be managed both to withstand sudden blows and to avail itself of sudden unexpected opportunities.

This means that in turbulent times the fundamentals have to be managed, and managed well". In the Indian context, there are still many opportunities for achieving sustained productivity improvements in all kinds of businesses.

However, some more "out-of-the-box" thinking is needed from the manufacturers, and some truly creative "collaborations" have to be visualised and brought into existence so that consumer spending continues to grow strongly, and thereby allows the Indian economy to maintain a virtuous cycle of growth for many years to come.