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August 04, 2008

"Expensive Economy"

Businessworld has a cover story on how rising input costs, specially that of labour and power, coupled with shifting political alliances have made India an expensive business destination.
Services, which accounts for 54 per cent of India’s GDP, is one frontier the country has to guard dearly. The sector has been hit by facilities and manpower expenses, which account for 65-70 per cent of costs. Several MNCs — including Nokia and Dell — have shut their captive business process outsourcing (BPO) units in India. “HR costs are growing at 15-20 per cent every year; globally, they grow at 2-5 per cent,” says Tanmay Kapoor, partner of business advisory at Ernst & Young (E&Y). In most areas of the services sector, CEOs in India are actually earning more than their counterparts in the US. The Rs 34-crore Cairn India’s CEO Rahul Dhir’s remuneration in 2007 was nearly Rs 7 crore. The median for a CEO’s salary in the US is $1.1 million (Rs 4.4 crore).

...A bigger challenge for companies is that demand-supply imbalance is raising employees’ salaries without adding to their skill sets. When London-based Axiom Estates was hiring its India staff, it analysed the wages versus skill sets of candidates in India, the UK and the US. It eventually hired the top level from the UK and the US and placed them in India. “We found that for that price, the skill level wasn’t that good in India,” explains Rajesh Goenka, chairman & CEO of Axiom Estates, which sells Indian real estate properties to buyers around the world.

Then there is the workforce inefficiency. “Labour in India is far more inefficient than labour in any developed country,” says Gaurav Taneja, partner at E&Y. A survey by Kelly Services, the world’s fourth largest recruitment company, last year said people efficiency in India (measured by financial performance against targets and deliveries) was barely 50-60 per cent against the global average of 80-90 per cent. “If you account for the cost of hiring, attrition, training and inefficiency, India will rank very high,” says Dhirendra Shantilal, Asia-pacific head of Kelly Services.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.