The Hindu Business Line : Red carpet today, pink slip tomorrow

The Indian corporate sector is fast in mimicking the West in many wrong things. It is now trying to follow in the footsteps of American and European companies by throwing out employees citing global recession as the excuse. However, Indian companies have never paid their employees global salaries, so how can they now so easily embrace the global or western model of ‘hire today, fire tomorrow’ to reduce their costs?

Conservative approach

The impact of global meltdown on India is much less than several other countries. Thanks to our conservative public sector banks and a staid RBI in not permitting exotic derivatives and other such financial products to enter the country, the banking system is not directly affected with loads of toxic assets.

Our banks, insurance companies and financial institutions have not burnt their fingers, by avoiding risky CDOs (collataralised debt obligations) and CDS (credit default swaps). Indian banks are also not highly leveraged and hence any incremental bad debts will not erode their capital base.

India is only indirectly affected by the global meltdown, by way of declining export of goods and services and less foreign capital flows into the country. Hence, there is only a slowdown in India, and not a recession. Does this mild slowdown really constrain companies and promoters to throw out employees left and right, without any heed to the social implications of such ruthless actions? Or are companies trying to take advantage of the situation to prune manpower?

Past mistakes

Indian promoters are perhaps trying to cover for their own past mistakes in judgment, business strategy, etc., and redeem the cost of their past mistakes to some extent now, by reducing manpower and manpower related costs in the context of global slowdown. Many mistakes have been committed by promoters in the past during boom-times, and the cost of such mistakes is being paid for now by these companies, and by their hapless employees.

Many promoters, in both manufacturing and services sectors, have acquired foreign companies at astronomical prices, many times at 3-4 times their fair enterprise values. In the process they have borrowed heavily to fund the acquisition of such white elephants. In those boom times, the promoters had illusions of making their companies into global empires in no time.

Many companies went into unrelated diversifications and pumped in huge amounts in buying land banks.

In the software services sector, many companies, in their greed for growth and to be counted big in the rat race, created a large bench of unproductive employees.

Many a company did not preserve the cash generated during the boom-times for rainy days. They could not anticipate the general business cycles in advance and were dreaming of eternally high double-digit growth.

Hence, when the business cycle changed suddenly, these companies had no preparedness and no contingency plans to boldly face the situation.

(The author is former MD, Ahmedabad Stock Exchange Ltd. The views are personal.)

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