Broadbase the growth

The PM has appealed to the corporate sector to reduce CEO and senior management salaries.

His logic is that too much inequality creates social tension and the benefits of four years of 8% per annum economic growth have gone largely to the English educated urban elite.

As the UPA government enters the second half of its five year term putting out this argument does make political sense. And it is also true that if the benefits of economic growth are cornered by the elite it will lead to frustration and unrest among those who desire to participate in the Indian economic miracle but do not possess the wherewithal to do so.

However it is important to understand how the current situation has come to pass. Why ‘trickle down’ is not working. Why growth is not inclusive. This will help the government take action to ensure that the base of those benefiting from the India growth story can widen.

There are three issues the PM has touched upon – first the high salary growth among white collar staff (whether CEOs or senior management or junior and middle managers), second the benefits of economic growth being limited to the English speaking urban elite and the third the evil of greed and self interest.

I’m not much of an economist – though I did study the subject in college and at business school. However here are my two bits.

Where CEO salaries are concerned it is important to distinguish between promoter CEO's and professional employee CEO's.

As far as promoter CEO's are concerned there are existing provisions in the Companies Act which are meant to ensure that at least for publicly listed companies promoters don't determine their own salaries - these are provisions limiting the total compensation of full time directors, the requirement of independent directors on the Board, the requirement of a remuneration committee etc. All you have to do is ensure that this system works - the independent directors are truly independent, the remuneration committee does its job and so on.

The situation for professional CEO's, senior managers and other white collar workers is different.

If salaries of white collar workers are growing at a rapid rate it is because growth in demand for that kind of talent is outstripping growth in supply.

Companies vie for talent in a very competitive marketplace. It would be very difficult for individual companies to ignore market forces when it comes doling out increments to their employees. Professional managers are frequently not wedded to their employers. Most companies would like to pay employees less but they don’t have a choice. To retain quality staff they have to match market salaries. Paying less than the market and losing talent as a consequence would be the kiss of death.

Salary growth will taper off if demand for talent goes down or else supply increases.

Demand for talent will go down in the foreseeable future only if economic growth slows down and that’s not desirable.

What is desirable however is that supply of talent increases. That way everyone wins – industry wins because it has the wherewithal to grow faster, the people win because more get jobs and the government wins because it collects taxes on a larger base, inequality and social tensions are reduced and voters are happy.

Now how do you increase the supply of talent. It’s easy to say but hard to do – reform the education sector.

Better execution in the government school system – ensure teachers come to school and teach well, ensure that government schools have adequate infrastructure and ensure more student attendance in government schools. Private schools will take care of themselves.

Empower school children with skills that are marketable. In one word teach them English. If most high paying jobs are cornered by people who can speak English then the market is giving you a signal. Proficiency in English is a valued skill. It is the language of business. Teach people English and they will get jobs.

My driver knows this. He spends close to forty percent of his salary sending his children to a private English medium school in the resettlement colony where he lives in Trans Yamuna. He knows that their future is secure if they learn English. It is the language of the white collar worker, it gets you ahead in life, it gets you jobs, it is aspirational – it is the language of upward mobility in India. We may not like this but it’s true.

Out of a misplaced sense of nationalism our politicians may have promoted Hindi and other Indian languages in schools at the expense of English (while many of them were sending their own children to English medium schools). But it is English that is a marketable skill. Two or three generations of Indians have been sold down the river as a result of this folly.

Apart from reform in government schools what is needed is reform of higher education. We are producing an army of unemployed and unemployable BA’s. For a large section of Indian youth, college is something you go to in order to get a label of being a graduate without any significant value addition. And what you study in college equips you poorly for any of the jobs that are available in the real world. There is a serious disconnect.

What the government needs to do is ensure colleges teach things that help people get jobs. Now that would mean an overhaul of the state owned colleges, allowing relatively free entry to private colleges with fewer controls and ensuring the REC’s, IIT’s, IIM’s and other centres of excellence are given independence.

It would also mean that colleges become market driven – now that’s something that won’t please a lot of academics. It would mean there is close interaction with industry to ensure that students are acquiring knowledge and skills that are relevant to the workplace. It would mean constant and frequent upgrades of the curriculum. It would mean that the faculty themselves would have to work hard to continuously acquire new skills and knowledge.

It would also mean rewarding the teaching profession better – so as to attract better talent into teaching.

It would mean making teachers and college managements more accountable for measurable results.

Finally this will mean allowing colleges to charge, at least the better off students, fees that reflect the real costs of running these institutions. After all quality upgradation requires investment and that money has to come from somewhere. It is logical that the money comes from those who can afford to pay and who benefit from the education. And they would be willing to pay if they see a reasonable prospect of getting a good job at the end of it.

You may argue that education reform is not a short term solution. But it just takes fifteen years for a class that is today in kindergarten to graduate from college. And that’s not a long time in the life of a nation. If this had been implemented in 1991, at the start of liberalization, we would have been seeing the benefits by now.

What this is about is large scale upgradation of Indian human capital. Convert the large population into an asset from a liability. India's growth will be fuelled by its human capital. That's what has happened thus far. Recognise that and reinforce it by investing in human capital.

Apart from increasing the supply of talent (read empowering people with skills that are currently in demand) the government can also take measures to incentivise growth in those sectors that will enable the non English speaking urban elites to participate in the economic growth that is taking place – without necessarily having to acquire skills and qualifications that they do not have. In other words create demand for the skills that this population possesses.

This would mean ensuring growth takes place in sectors such as retail, infrastructure, construction, logistics and transportation, agriculture and labour intensive manufacturing.

So finally it is all about demand and supply – Microeconomics 101. Increase supply of the kind of talent that is in demand. And increase demand for the skills the deprived population currently possesses.

And you get broad based inclusive growth.

It would be a bad idea to kill the growth that is currently happening by capping salaries and curbing the basic human desire to get ahead in life – call it self interest, call it greed or call it the invisible hand. This desire to get ahead coupled with the opportunity to get ahead that has been provided by the policies of economic liberalization that successive governments have followed over the last decade and a half have largely fuelled the growth that is taking place in India today. Don’t stop a good thing.

Instead focus on how more and more people can benefit from the great Indian economic miracle that is currently unfolding.