In a relatively capital constrained country like India, it is imperative that all efforts are made to promote efficiency that encourages optimisation of resources and maximisation of the same. Innovation is the key. We need to think out of the box and ensure efficiency is encouraged with due consideration being given for adequate risk management.
To begin with, banks and financials institutions should encourage existing units that proven ability to get better bang for the buck. This should not be restricted to just the MSME's but to all units. Use of traditional evaluation methods like the debt equity ratio or the current ratio needs to be reviewed with more appropriate ones like capital employed turnover ratio or human productivity ratio. I am sure that we could find quite a few and give them weights to arrive at a composite index!
On the fiscal side too we need to encourage units with higher productivity and efficiencies with a lower tax rate! While we encourage new units with tax covers and incentives, we don't seem to recognise ones who drive greater profitability in existing ones.
Archaic labour laws that stipulate minimum wages appear to penalise employers as it does extract any commitment from the employees to ensure greater productivity. The employer is penalised with increasing inflation indexed dearness allowance. The employer has no control over policies or the lack of it, which drive inflation. Competition and customers are consistently driving prices lower. Considering that over 60% of the country's GDP is derived from the service sector, even assuming that 50% of the cost is represented by salaries, a 10% increase would imply that margins are down close to 14%! So here we are perpetually running to stand were we are by constantly increasing capacities.
All pointers therefore indicate that we need radically different thoughts to encourage efficiency!
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There are some very beautiful points : (1) Innovation (2) Human Productivity Ratio (3) The circle of Customer - Competition - Costs. Many large organizations have got pulled into a vicious circle, involving strategies and return on investment to shareholders / investors, and the act of managing max-productivity-min-cost. Having been in the banking industry itself, have gone through a phase where the banks and NBFCs played the volume game and believed that larger spreads and numbers would offset the rate of incremental costs incurred in areas of human resource management (recruitment, training, competitive pay-scales etc.), in the years 2004-2005. Large scale recruiting, outsourced set-ups were the order of the day. Over to 2008-09 and thereafter, volumes couldn't be maintained. Markets dictated rates which could not gel with the volume philosophy. We soon observed that all these institutions quickly switched over to the low cost model. Reduce costs to its minimum to enhance margins. We called it the "OPEX" mantra. (Operating Expense). The automatic stress was on employee productivity. All three points mentioned above came into play. The entire system worked on "Necessity is the mother of invention" principle. Boundaries were placed on all fronts - Costs, travel, stationary, and any other cost that you could even think of. Imagine, running from pillar to post for a sheet of paper. However, this constraint forced people to think of technology based alternatives without paper. Go Green movements began. In true abhishek bachchan style one could say - what an idea, sirjee !! I think the movement on considering human productivity did begin, in mid 2009 for a short time span. However the time investment required to set up the culture was always at loggerheads with the business and moolah. It was not sufficient for employers to drive productivity. Efficiency was required to be driven as a culture amongst employees. Organizations still kept looking at shorter ways to get quicker money. So do I spend time on enhancing productivity, or do I spend time in making the most of the market conditions given the existing level of productivity is the question. That is where you have the likes of SRF on one side and ICICI on the other. Net Net, While efficiency evaluation and optimization is needed, there are strategists, who come up with ideas where efficiencies are pre-defined and employ manpower accordingly. Investment in processes, where only a select heads think, and others are there just like machines to perform certain tasks.
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