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Restaurant industry has been badly hit by job losses and pay cuts. (AFP)
Restaurant industry has been badly hit by job losses and pay cuts. (AFP)

Firms’ cost rationalization steps may pinch demand

  • A reduction in employee expenses by way of job or salary cuts will hurt consumption
  • Most corporates lost sales in March and hence the ratio of staff costs to net sales looks adverse

MUMBAI : Most companies are restructuring their business to reduce fixed costs as India Inc limps back to normalcy after a nationwide lockdown to stem the spread of covid-19.

A reduction in employee expenses, with cost rationalization remaining the key focus of corporates, may weigh on overall consumption, according to analysts. Employee expense is one of the critical and major components of fixed cost that companies bear.

Employee cost as part of net sales rose to a 19-quarter high of 15.69% in the January-March quarter, against 13.75% in the same quarter of FY19, for 351 companies in the BSE 500 index, according to a Mint analysis. The review excludes oil and gas, banks and financial companies.

Graphic: Mint
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Graphic: Mint


It is natural for companies to reduce fixed costs, especially high staff expenses as net profitability and sales have taken a hit. However, a reduction in employee expenses by cutting jobs or reducing salaries will pinch consumption and demand.

“Most corporates lost sales in the last fortnight of March and for some of them this is a large sales period seasonally. As the denominator has shrunk and the numerator has remained the same or risen a bit, the ratio of employee costs to net sales looks adverse," said Deepak Jasani, retail research head, HDFC Securities Ltd.

“First, a cut in salary and loss of jobs will have an effect on the ability to service home loans and the possibility of a large number of defaults looks likely. Second, given lower take-home pay, people will cut back on discretionary spending, which will impact the demand story," said Madan Sabnavis, senior economist, CARE Ratings. There have already been two kinds of cost rationalizations on the staff costs side, Sabnavis said. One is direct retrenchment and the other is pay cuts. Firms have used a combination of the two along with a hiring freeze to control costs.

“The sectors most affected by such cuts on both sides are in services, such as media, entertainment, hotels, restaurants, tourism, aviation, transport. Further, manufacturing, automobiles, durables and clothing, which are related to consumers, have witnessed cost cuts. For machinery and metals, the situation is better as skilled labour has to be maintained when things turn around. Here, pay cuts have been the rule. Finance, especially NBFCs and banks, to an extent, have also gone in for staff cuts," he said.

A majority of retailers have guided to reduce their fixed costs. Aditya Birla Fashion and Retail Ltd said employee cost optimization should lead to annualized savings of 20-25% ( 50-60 crore) in FY21. V-Mart said its staff cost is expected to reduce by 25%.

“Overall demand and consumption in urban and semi-urban areas may be impacted for a few months because of reduction in employee expenses. However, buoyant rural demand because of the bumper crop expected and government spending could partly compensate for this shortfall," said Jasani.

Jobs should improve as the economy opens, but even a 95% normalization may not be enough to cut the labour market slack, according to analysts at Edelweiss Securities Ltd. In India, not only banks have been weak, but even MSMEs–the backbone of job creation–have been badly hit for some time. “And, of late, it seems that larger businesses are also looking to rationalize wage costs. All this, along with underwhelming policy response, preclude a swift normalization in India’s labour market,"said the analysts.

Ravindra Sonavane contributed to this story.

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