Motilal Oswal report: Is labour losing the battle against capital?

An analysis of annual survey of industries since 1980s

According to the annual survey of industries (ASI) for 2014-15 released a few months ago, labor employment has increased at an average of ~2% over the past 35 years, while capital employed has grown at a CAGR of ~14%. The situation has not been different in the past few years. On the one hand, there is growing demand to increase labor employment. On the other, the voice for rate cuts is gaining strength as some sectors remains highly leveraged. However, from a broader economic perspective, capital is only one of the four key factors of production that compete directly with labor. ASI data confirm that the cost of a unit of capital (interest + depreciation) has fallen from ~16x the cost of a unit of labor in the early 1980s to less than 0.6x in FY15.

Considering the productivity differences and stringent labor laws, it is not surprising to see Indian factories preferring capital over labor. These facts question the legitimacy of further rate cuts, which will encourage companies to replace labor with capital in a labor-abundant economy. If the policy makers want the manufacturing sector to increase employment meaningfully, we believe making capital relatively cheap is certainly not the right thing to do.

Read full report here

Read the rest of this article by Signing up for Portfolio.It's completely free!

What You'll Get





MORE FROM BUSINESSLINE


 Getting recommendations just for you...
This article is closed for comments.
Please Email the Editor