Monday, 28 May 2007

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.


Anonymous said...

I am not sure how to react to this dictum by our Economist Prime Minister, Manmohan Singh. I think the decision lies with the shareholders and no one else.
Its plain and simple, Does having a CEO with high salary give enough ROI...if answer is yes, go ahead and give him for what he deserves....

Subho Ray said...

great to see you blogging. just dont make it too heavy:)

Subho Ray said...

Great see you here.

Pandiarajan Subburam said...

Good to see your Post. Will industry think everything has to be done only by the government. What about Corporate Social Responsibility of Industries? Are our industries ready to invest in Indian Education System to get a better talent. Industries are investing on Infrastructure, Sales&Marketing, Operations, retaining the talent and etc.,, but what about talent creation from scratch. Are companies ready to fund even from schools and colleges for better technology and infrastructure which will be beneficial for our children?

can i get an answer for this?

The Truth Teller said...

Its always a learning experience to read such informative blogs.
Though i agree with Pandiarajan to an extent, but at the same time lets not forget what are the stakes.
Companies like Sony have set examples of adopting whole villages in Japan in the early 70's-80's. They took care of each and everything...from education to employment. And as a result 18-20 yrs later, when the people of that village had the capacity to spend, they bought Sony products. Not to mention some of them got jobs with the company itself.

Even in India, major players are involved in huge CSR activities.Tata, Reliance, Birla, Mahindra,ITC and many more are , in some way or the other, involved with "Upliftment and development."
But the point here is ....if we look closely "capacity" to undertake such a task counts. A thousand Crore rupee turnover company can afford to get involved with such a project but in India, there is a large number of developing companies which might have the willingness to do such a thing, but their capacity doesn’t let them do it.
Now coming back to why a government can undertake such a task. I might sound very clich├ęd but then one fact is that Thousands of crore rupees get "lost" every year...unaccounted things like "MP's maintenance and welfare" and other sanctions. By far, a government is far more capable of undertaking and completing such a task. A helping hand from industries would be great..but dependence on them is not a good idea.
Lets work towards an efficient government and an effective system by being responsible citizens and lets act like one to get the desired results.

Sugeesh said...

Dear Sir,

I agree with your opinion on changing the education sector...The symptoms have to be addressed at the grassroot level...The current curriculum is ill-equipped to teach students the practical realities of the corporate world..
We need to incorporate a system in the education field which monitors the trend in the market and adapts to the situation...This might mean changing a curriculum in a short period of 6 months...Flexibility and Adaptability coupled with a passion to Learn new things has to be the new mantra if we need to create Leaders for Tomorrow...

Musings on India said...

One must filter the political stuff out from what Manmohan Singh said. Ankit sorry to say but other than a few high quality intiatives, most companies in India pay lipservice to CSR initiatives. Its merely a PR tactic for them for for education related activities, its more linked to their HR strategy.

The US with a relatively cleaner political/governance system and with a huge budget for education is suffering from major education related issues. India with its demographic timebomb needs to do a lot more.

How do you teach 2.2Cr people who get added to our population each year. Does the govt have the money to set up schools for them? Universities for them?

As sanjiv said, they have to let certain market dynamics come into the education system. Do we see that happening? NO. Would the govt. make it easier for top universities to set up operations in India or high quality private players in India to scale up? NO.

R. Rajesh Jeba Anbiah said...

It seems to me that you're trying to define talent as the one that is milking today. In that case, your opinions wouldn't work, IMHO.

Ashutosh said...

I appreciate the post and the opinions too...

Neeraj said...

I too agree, to whatever you have said in this blog. but as Mr. pandirajan points out, a part of the responsibilty has also to be taken by the corporates. The government has to do and should take the steps that you mentioned. but what i could make from your blog was, asking the government to make everyone white collared, if they are the ones getting hefty packages.
an economy always rides on the manufacturing sector, and those are the people who are paid the least. Your driver understood that making his children learn english is a way to getting big wallets, but you cannot make everyone in the country go for the white collared jobs. whats really needed is a well structured appraisal and reward structure in manufacturing sector. only then can the trickling down happen. i agree with the people using their brains getting good salaries, but we need limbs too to make a man walk. brain can think but execution has to be done by the blue collared ppl.
unless their contribution towards the growth in economy is fully rewarded, the change you are talking about can never be brought about.

Renu Sharma said...

Its good to see people like you jumping on blogging world.

Selvakumar said...

Very happy to read a CEO's Blog sir. is doing a great service to the society. keep it up the good work sir.

Manoj said...

pandian and others, methinks csr will take its own course and will be guided by the economics of roi. corporates will invest in education reform if they c long term economics in it for them. what is required, rather than debating whether csr is real or not, is getting the chieftains of industry under a common aegis (CII,FICCI??) and debate whether csr in educational sector is good economics for them, if yes then each to its own!!!
Cheers Sanjeevji, refreshing views, and thought provokers are welcome!!(a thought for you.. why just blog, why not write for a newspaper as well?? (ToI? ;-))

Amit Sinha said...

you are bang on about the market valuing english.
this thing about the market understanding the value of english. we have studied a lot of the rural ICT ventures where internet kiosks are set up in the countryside, during the last 3-4 years. what we discovered was that the market does not pay much for many services that experts have identified. on the other hand the market pays readily for things perceived as good for jobs, economic upliftment, etc. - and in this sphere two services stand out - educational courses connected to english and to computers. they spend significant amounts on these.
apart from these serious things they spend only on entertainment in a significant manner - eg. go to a rural IT kiosk check the urls in history and you will find many adult sites, or film based sites.

Anonymous said...

Hey Sanjiv,
Came across this blog of yours and went thru this article " Broadbase the Growth".
Sanjiv, in my opinion there is no need to feel guilty or explain how packages should be determined.
Looking at yourself from your own perspective is one thing but if you really want that younger ones should get inspiration for entrepreneurship, guys like you, Hitesh and other early members of the team should proudly have all the glory, money and everything....After all how many took this plunge.... how many survived...and how many reached this stage. I expect a lot of boldness from guys like you. If you see the modesty part : well, to my mind modesty can be shown through what you do with this money/package/glory/power....

Kamal Wadhera

Anonymous said...

hi bikhchandar,




Sweta Dutta Gupta said...

I wanted to meet you at our induction session but unfortunatly you were travelling, so its a gr8 plesure to see your thoughts over here.
I loved the way you canvassed the article but technically I feel its the phenomenon that we had studied in our economics high school days,the effect of Kuznet's curve, so the point our economist minister is supproting, in my perception is apt.
Talking about liberlisation , for a nascent state like India,15 years is still a cradle state sitting in a rocking chair of stagflation.
Therefore, at the moment nothing can be decided. Yes India is growing at a decresing pace but I am sure if this set of govt stays for a while India will count its incresing rate on yields very soon.

sunrisevilla said...

nice article