By Tony Munroe
MUMBAI (Reuters) - A strengthening currency and rising wages threaten to erode India's vaunted cost advantage, forcing companies to economize and innovate to remain competitive.
The rupee is up 12 percent this year against the dollar, and its surge to its strongest in nearly 10 years has caught many executives off-guard and eaten into margins in key export-focused sectors such as software services and textiles.
Wages, meanwhile, are forecast to rise by 14.4 percent in 2008, a fifth year of double-digit growth as companies fight for talent, according to consultants Hewitt Associates.
"India's real competitive advantage is people," said Alan Rosling, executive director of Tata Sons Ltd, the holding company for one of India's biggest business groups. On the other hand, he said, "the biggest constraint we face is people."
"Over time, obviously the competitive edge in terms of pure cost is going to erode," Rosling told the Reuters India Investment Summit.
"We need to become innovators," he said.
India's leading biotechnology firm, Biocon Ltd (BION.BO: Quote, Profile, Research, Stock Buzz), told the Reuters Summit that margins would be hurt by the stronger rupee for at least another six to nine months.
"Times are tough," said Kiran Mazumdar-Shaw, chairman and managing director of Biocon. "It is an absolute concern for us."
The rupee is expected by many observers to continue its rise given economic growth of nearly 9 percent and robust foreign fund inflows -- a prospect that Indian firms have started to plan for.
"We all have to just recognize that the rupee will continue to strengthen for some time," said Chanda Kochhar, joint managing director of No.2 lender ICICI Bank (ICBK.BO: Quote, Profile, Research, Stock Buzz).
"Industry, I guess now, is becoming more aware of this fact and starting to build it into their plans going forward," Kochhar told the Reuters Summit. "What happened in this last one year is that kind of planning didn't happen."
A rising rupee has advantages for firms, making overseas acquisitions and procurement more affordable. Other costs are subdued, with inflation at five-year lows of 3 percent thanks to monetary tightening and state-subsidized oil prices.
"Whatever they lose in terms of margin because of the rupee, they will try gain by productivity and efficiency improvement," Kochhar said.
Wipro Ltd (WIPR.BO: Quote, Profile, Research, Stock Buzz), the country's third-largest software services firm, has factored a 2 to 3 percent appreciation into its business model, Suresh Senapaty, the firm's chief financial officer, told the Reuters Summit.
Every unhedged 1 percent rise in the rupee against the dollar trims 30 to 50 basis points from the margins of India's export-focused software services firms, which generate more than half their revenue from the United States, analysts have said. Continued...
© Thomson Reuters 2009. All rights reserved.
| India Investment | Nov 23 - 25, 2009 | Country Summits |
| Global Finance | Nov 16 - 19, 2009 | Financial Services / Exchanges |
| Health | Nov 09 - 12, 2009 | Health |
| Autos | Nov 02 - 4, 2009 | Autos |
| Middle East Investment | Oct 26 - 28, 2009 | Country Summits |
