Analysts have been puzzled by the fact that so many Indian companies have managed to protect their profit margins despite galloping wage and raw material costs. The quarterly results that have rolled out into the public arena in the last few weeks show that companies continue to climb the efficiency ladder.
Credit-rating agency Crisil recently published a study that puts this fact into its proper perspective. In the five financial years to 2005-06, various input costs have risen substantially because of the worldwide rise in commodity prices. Oil prices rose from $20 a barrel to $62 a barrel. Metal prices have leapt out of the recession-induced troughs of the early years of this decade. Inflation in these primary commodities has fed price rises in other key inputs used by Indian industry.
Crisil has looked at the operating efficiencies of 5,000 companies in nine key industries over five years. In this period, sales of the sample companies have grown from Rs3,98,800 crore to Rs 7,00,700 crore, at a compounded annual growth rate (CAGR) of 15.5%. Operating profits grew at a faster rate of 22.39%—from Rs54,300 crore to Rs1,21,900 crore. Naturally, operating profit margins (which is what companies earn before charges for depreciation, interest and tax take their toll) have climbed.
How was this done? Though raw material costs as a percentage of total sales have kept rising over the past five years, these companies have squeezed costs in other parts of their operation to protect their profits. “Operating margins have expanded to 17.39% from 13.62%. This was possible because of higher realizations and increased operating efficiency,” says Crisil in its research note.
Data of this sort is particularly significant when there is an animated debate on whether productivity growth in India is not as good as it is commonly made out to be. The Economist has quoted a recent study by Barry Bosworth and Susan Collins of the Brookings Institution that says that productivity growth in India grew at 2.3% a year between 1993 and 2004, while China’s grew at 4%. Interestingly, the gap is even wider in the industrial sector: productivity growth of 1.1% in India versus 6.2% in China.
Bosworth and Collins measure total factor productivity (TFP), a broad measure that is a residual—what is left over from a country’s growth rate after the contributions of labour and capital have been accounted for.
Calculating TFP is a methodological minefield and there has been little consensus on what the exact trend in India’s TFP is. So it requires a leap of faith, and a hint of irresponsibility, to draw sweeping conclusions from one study.
While these macro battles rage, there can be little doubt that the micro data shows large productivity increases in important parts of the Indian economy. Neither the view from the ivory tower nor from the shop-floor can be ignored. But the Crisil study is clear proof that Indian manufacturers have cut costs and improved their operating efficiency in recent years.
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