The rate of decline of the economy continues unabated and so do the consequent job losses. The two stimulus packages have not shown any effect and the economic mandarins are still arguing that these have a lag effect. A recent survey by the labour ministry has declared that over five lakh jobs were lost in three months alone as companies either lost business,or confidence,or both. The momentum of job losses threatens to increase.
It is in this background that the finance minister urged the industry to use pay cuts as the preferred route to restructuring businesses rather than job cuts. This request,as well intentioned as it is,confirms a widely held view that the government still hasnt quite understood the severity and the nature of the crisis facing industry.
Some background here may be necessary to describe why this suggestion from the policymakers will not find that many takers.
The Indian job market is dominated by the unorganised sector accounting for about 94 per cent of all jobs. The organised sector jobs are in the small and medium enterprises segment and the larger corporates that make up the economy. The ministry of labour survey points to deepest losses in the exporting sector,the automobile and transport sectors with varying losses in other sectors as well.
Under the current bleak economic scenario,companies are faced with two distinct types of challenges. One set of businesses (the SME,unorganised and exporters) is faced with a fundamental survival or solvency issue. The other set of Indian businesses is faced with the challenge of a demand slowdown requiring restructuring of its business plans. The responses are,therefore,quite different: the first one requires a permanent contraction by shedding or closing divisions,businesses or companies,and,the second is a temporary restructuring of costs a pause,by pay cuts,hiring freezes,reducing work weeks,etc.
It is quite obvious that the first group of industries struggling to stay afloat and solvent is going to pay heed to this call from the government. The job cuts are forced and not by choice. But,the second group that is grappling with the slowdown could be that which could pay heed but is not going to. It is also increasingly resorting to layoffs and not a pause strategy,because of a fundamental reason even here,businesses and entepreneurs are perceiving this slowdown as a deeper,longer term phenomenon and not a temporary pause.
This is the point that needs to be understood by the policymakers. That the loss of confidence has been so sharp and fast that the perception gaining currency is that this economic crisis is going to be a long protracted one. As long as the perception is of a deeper,more painful economic slide,firms will act accordingly and restructure to a more permanent and longer term model and even scale back investments. On the contrary,if the perception was a temporary slowdown,firms would adopt a more temporary pause strategy for which the government suggestion of temporary pay cuts would work.
Unfortunately what is out there in terms news flow of data,government speak and central bank prognosis for the coming year and the general gloom about the global economy all add up and point to a longer term economic malaise facing India. Predictably,companies are scrambling to this challenge. The recent inaction in the interim Budget only adds to the general perception that there are no immediate solutions to this and that therefore companies need to reinvent themselves.
So while the governments request to the industry is steeped no doubt in good intentions,there will be few takers!
(The author is an MP and immediate past president of Ficci)