Labour productivity declined, capital productivity inched up a bit

With the extensive restructuring of the Indian corporate sector over the last few years, the stage should, logically, have been set for a sharp rise in productivity. To test that thesis, the BS Research Bureau studied the business performance of the BS 1000 companies from the point of view of productivity.

The results are surprising. There has been no across-the-board rise in productivity. Instead, labour productivity has shown a modest decline while productivity on the basis of capital employed and the productivity of assets registered a small improvement in 2002-03 over 2001-2002. 

There are reasons for this. Labour productivity declined in 2002-2003 because the salary and wage bill of the sample companies grew by 12.94 per cent while their sales grew by 12.73 per cent. Productivity in terms of sales as a percentage of capital employed increased because the capital employed by the sample companies rose only by a modest 2.69 per cent. 

Labour productivity has always been sector specific. High labour-intensive sectors like technology, engineering, telecom and steel show lower labour productivity as these industries are labour as well as capital intensive. Wages were 21.83 per cent of the Steel Authority of India Ltd’s (SAIL) sales in 2002-2003. The figure for Tata Steel was 16.59 per cent. For Bharat Heavy Electricals Ltd the salary cost was 23.40 per cent of sales. Mahanagar Telephone Nigam Ltd’s salary cost was 24.69 per cent of sales. For Infosys Technologies, the salary bill was 46.29 per cent of sales. 

The aggregate labour productivity of the sample companies (18 firms, two each from a sector) is down, from Rs 17.31 lakh per Rs 1 lakh spent on employees in 2001-2002 to Rs 17.28 lakh in 2002-2003. The ratio of net sales to capital employed during the period increased from 1.36 times to 1.49 times. The sales to assets ratio was up from 0.97 times from 1.03 times. 

Still, the performance of the BS 1000 toppers shows that modernisation and cutting the cost of labour through voluntary retirement schemes have enhanced productivity. Further, a comparison between companies in the same businesses like Hero Honda and Bajaj Auto, Tata Steel and Steel Authority of India (Sail), Indian Oil Corporation and Reliance Industries, clearly reveals that technology upgradation has been key to achieving higher productivity. 

However, the difference in product mix between companies such as Maruti Udyog and Tata Motors, Hindustan Lever and ITC, Mahanagar Telephone Nigam and Videsh Sanchar Nigam, BSES and Tata Power can result in a vast divergence in productivity. Furnished below are a few examples of how India Inc has improved produtivity. 

ONGC improved its financial productivity by restructuring long term debt. The company reduced its debt/equity ratio of 13.91 in 2000-2001 to 1.02 in 2002-2003. Its interest cost declined from Rs 600 crore in 1999-2000 to Rs 113 crore in 2002-03, as the company restructured its long term debt worth Rs 7,723 crore in three years. 

Comparing Tata Steel and SAIL, we find that the cost of labour has played a major role in productivity. SAIL’s labour cost was 21.83 per cent of net sales, while for Tata Steel it’s only 16.59 per cent. Obviously Tata Steel’s labour productivity was higher at Rs 6.03 lakh than SAIL’s Rs 4.58 lakh per Rs 1 lakh spent on salaries and wages. 

Reliance Industries’ labour productivity of Rs 92.66 lakh in 2002-2003 is higher than Indian Oil Corporation’s (IOC) Rs 62.36 lakh. This is because Reliance has a more modern refinery than IOC. However, Reliance and IOC have large differences in operating margins as Reliance also operates in the petrochemicals sector (low margins). IOC’s operating profit margin of 32.36 per cent was higher than RIL’s 18.68 per cent.