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Tuesday, November 27, 2007

Dollar Versus Rupees

Reverse of the ‘labour cost advantage’ enjoyed by emerging India Corp

A recently formed Indo-European joint venture just setting up operations here in India has decided to go in for an expatriate country head after evaluating the compensation matrix. The argument was simple. “For $400,000 we can get our man in Brazil or China to come down here as country head, rather than paying $500,000 or Rs 2 crore to an Indian,” said the foreign partner. Nor is this a one-off case. The head of a multi-billion-dollar manufacturing firm expressed a similar view in a recent interview.

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For years, the ultimate dream of a middle-class Indian was a dollar salary. Not any more. The greenback’s gloomy present is giving birth to an ‘executive cost arbitrage’ in India. With the rupee appreciating against the dollar, expatriate managers are becoming more cost-effective for companies for even their Indian operations. On the other side, executives working abroad have started asking for adjustments in their dollar salaries. So far, an expatriate was preferred only where there was a skill-shortage, especially in emerging businesses like retail and hospitality, or technology-linked areas like telecommunication and aviation (pilots). In short, companies brought in foreigners as top managers because they were struggling to find the right people for the right job. The boom in sectors like retail, aviation, pharmaceuticals and hospitality had created a dearth of skilled manpower. And often, these managers were paid a premium for their skills. But now companies have started hiring expatriates because they come cheap. This is just the reverse of the ‘labour cost advantage’ enjoyed by emerging markets. Multinational companies have been moving jobs to countries like India and China to take advantage of lower wages. The executive cost arbitrage could lead to a situation where the country witnesses a major influx of expatriate managers. For expatriates already working in the country, the dollar pinch varies from company to company. Some organisations have started giving a special currency allowance to their expatriate managers. The exchange rate takes into consideration a rate of Rs 40 to a US dollar. And though it doesn’t track the actual exchange rate fully, it compensates for the sharp rise in the value of the rupee.” For many others, however, it has been a losing game as the rupee has appreciated 10-15% this year, and the dollar is not showing any signs of clawing back. In equity market of the tech shares are running 52 weeks low. This hits real hard. For instance, an American executive who was getting $500,000 has seen his salary dipping from Rs 2.25 crore to just Rs 1.97 crore now. Says the CEO of an MNC carmaker: “Costs are going up in India, but in real terms the dollar has squeezed our pay packet. It’s a double whammy.”

11 comments:

Anonymous said...

Dibyendu,
I am answering your question from an individual perspective.
I work for the outsourcing/offshoring industry and most of my clientele if not all is based out of USA. And the list of my prospects are populated with US contacts. The downside of rupee appreciation are:
a) Less outsourcing to third parties in India, even lesser MNC's setting up captive centers (real estate is at an all time high)
b) Lack of jobs for Indians as most companies would rather have an expat.
c) Salaries of people working in MNC's would come down by a lot.
d) Last but not the least as I am into sales my targets would go up drastically.

Now for the people who have been enjoying the rupee appreciation I have a couple of questions:
a) Have the prices of daily goods and utilities come down with Rupee appreciation?
b) Apart from the super rich of India whose net worth has grown overnite thanks to rupee appreciation

And yes a key statistic tells me that BPO industry creates more jobs a year than all Indian congolmerates collectively

Anonymous said...

Of course, expatriate managers would like their salaries for adjustments in dollar because of appreciation of Rupee against dollar, everything would be expensive. That way, i believe it's going to hurt the growing economy of India because of its high valued currency. Foreign investment is main economy factor for India, but same to any other developing nations, so India should have thought that they are competing with other emerging countries to attract more foreign investors to let them invest in India.

Anonymous said...

I can give a more complex perspective involving fluctuations of exchange rate impacting the EXIM of US trading partners but I will save it for some other time. Bottomline while it was an emotional issue for developed nations on losing jobs to others, now is a chance to get a prized job in India and appreciate our daily grind : - )

Anonymous said...

Next step....US hits recession and the bubble bursts big time....lots of job losses towards the start of 2008....and as US market nose dives, all other world markets will follow.

Indian stocks are artificially inflated....and so are the property prices. So it will be the next to be hit.

Anonymous said...

In my Opinion, its short term.... All this is intentionally done by dollar pumped in by the United States !! Lets face it... around 70% of MNC and giants who are pumping the money in India are directly or indirectly influenced by US.

I see this bubble bursting in late 2008 !
But, again that just what I think :)

Anonymous said...

This guy, I think, says it best...but he's a bit of a pundit rather than an analysis

http://www.thehindubusinessline.com/2007/04/19/stories/2007041900060800.htm

Anonymous said...

Dibyendu,

The impact of appreciation of Indian currency against dollar vary from industry to industry depending on the nature of export import business whether the industry earn foreign currency or imports the raw materials or goods and spend in foreign currency. As you have mentioned regarding expatriate and executives working abroad, there is impact on the spending of foreigners visiting India and Indians visiting foreign countries. It is certainly a favourable situation for the Indians studying abroad who are good in numbers which will increase in the years to come.

Though, I am not an expert to comment on industrial growth due to appreciation of rupee, I will consider it to be positive for internal strength of the country because, India will be having increased buying power and Indian idustrialist will be better positioned for the aquisition of foregn companies which is happening in recent years.

Regards,

Jujhar

Anonymous said...

Hello Dibyendu

This is a short-term impact and will change drastically starting next Indian financial year.

Cheers!!
Raghav Pandit

Anonymous said...

Dibyendu, Good article. One of the long-held axioms among most Indians is that the rupee will always depreciate against the U.S. dollar. Many people are finding it hard to come to grips with the new reality that the 'lowly' Indian rupee can indeed appreciate against the 'almighty' dollar. The U.S. has become a debt-ridden bubble and, increasingly, foreing countries are becoming less interested in financing its profligacy. Among the dire options available to U.S. to manage its debt burden, allowing its currency to depreciate is probably the 'lesser evil'. So, those believe this is a "short term" trend may be in for a shock. What has surprised everyone is the rate of appreciation of Indian rupee against the dollar in the last 8 months or so, so some short term reversal is possible, but the long term trend is unfortunately bearish on the dollar (unless major policy changes are made by the new U.S. administration starting 2009).

A rapid currency appreciation does not help India in the short term as both capital and talent are globally mobile these days. Given the short decision cycle of most corporations, they will be looking for less expensive locations or 'greener' pastures to operate from. This kind of thinking will hurt a developing country more than a developed country as the former still has problems to be overcome in many areas of the economy, which the influx of good jobs and businesses will help mitigate.

Executives, who are globally mobile, are in a minority in India, so why worry about those making >$200K in India? The broader question is, what happens to the mass of professionals in middle management and lower levels in industries that are geographically unconstrained (such as IT). Given India's critical mass and credibility in the global scene in IT, the rapid currency appreciation will perhaps slow the rate of highly paid jobs and pay raises for such folks but a serious damage to the industry is unlikely in my opinion. However, some niche export areas (like textiles etc.) will probably suffer massive damage.

At executive levels, the dollar-rupee arbitrage is easily solved as there are plenty of talented American exeutives vying to have 'India' on their resumes. It is interesting that barely 10 years ago, an India assignment would be seen as getting the 'brush off' from the C-suite (not unlike the misfits in colonial Britain who were shipped to Australia ;-)) Today, many are lining up to do an India 'stint'.

All this goes to show that great changes can (and do) occur within a short period. Whether the current dollar-rupee exchange rate is fair or not, India should not heed to the exporters's cries to intervene and dilute the value of savings of Indian households (which is the major source of India's capital) - the way U.S. is diluting its residents' savings by making its currency worth less (I hope the space these two last words does not disappear when USD is mentioned in the future!).

Anonymous said...

Well, it would have its own share of advantages and disadvantages. It really depends on one's perspective.
From the overall growth, India's presence, world dominance etc..it means a lot.
For the IT sector, it means, shrinking profitability / margins. And if inflation & cost of living and hiring people goes up then this would mean further drop in margins, perhaps it will also affect our competitiveness in the mid to long-run.

Anonymous said...

Dibyendu: I see a short term impac...and again It would have bring its own share of advantages and disadvantages. For the IT sector, obviously it would mean, shrinking profitability / margins. And if inflation & cost of living and hiring people goes up (all signs which it would) then this would mean a further drop in margins, perhaps it will also affect our competitiveness in the mid to long-run.

Companies will, IMHO diversify their geographic mix. Already signs are that Infosys, Wipro and TCS are looking more towards Europe and LatAm than USA. Tactics like employing innovative strategies and contract terms for hedging currency risks in future will come in focus...

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