1. How many graduates are required to change a light bulb?

How many graduates are required to change a light bulb?

Kotak Institutional Equities builds on its April 2013 report where it identified the trend of too many graduates who may not find employment opportunities in traditional industries.

By: | Published: June 30, 2015 8:00 AM

Kotak Institutional Equities builds on its April 2013 report where it identified the trend of too many graduates who may not find employment opportunities in traditional industries. As (1) IT companies look to automate parts of service offerings, (2) banks cut lower-end jobs and (3) on-demand economy picks up and unstable organization structures loom, these will have implications on (1) the number and type of jobs created, (2) skilling and (3) consumer demand.
Large, traditional sectors are not where meaningful number of jobs are being created

Engineering graduate output of Indian universities stood at 1.5 mn a year in FY2015, up from 0.3 mn in FY2005, even as net hiring in the IT sector has remained stagnant at 0.25 mn over the past five years until FY2015 (see Exhibit 1). Similarly, the banking sector has created less than 0.1 mn jobs every year over the past five years (see Exhibit 2). As a proportion of India’s ~500 mn strong workforce, these sectors account for only ~1% of employment.

A McKinsey study notes that for the next US$100 bn of revenues for the Indian IT industry, only a million new jobs will be created, this number was 3 mn for the first US$100 bn (see Exhibit 3).

Automation or elimination of lower-end jobs is around the corner

IT companies have publicly stated that they are looking to automate meaningful parts of service offerings: Exhibit 4 details the announcements made by the IT companies and the initiatives that they have launched. Similarly, as noted in Exhibit 2, banks have been cutting down on the clerical and other subordinate staff. Automation of workflow can significantly impact the prospects of entry-level joinees – their work is more susceptible to being automated.

The implication of automation at the lower end will eventually travel up the organization

Exhibit 5 presents our simplified model of how the impact of automation could flow up a typical existing organizational pyramid. From a pyramidal structure, the shape of the organization could begin to resemble an inherently unstable diamond structure as the work at the lower end gets automated or digitized. Employees at the middle level, who typically would be groomed for managerial roles, would find no organization below them to manage and could be most at risk. Inherent growth in business may create some opportunities to manage this transition for mid-level employees. However, they would do good to be prepared for longer promotion tenures, separations, re-skilling and embracing the ‘on-demand’ environment.

The on-demand economy will be a corollary of and be aided by this automation

As skills begin to be more valued in the work-marketplace than process management, organizations, both organized and unorganized, will begin to look for ‘on-demand’ workers who join in for specific projects that require their skills.

This is, at its very core, the extension of the philosophy of outsourcing. From IT professionals with specific skills to taxi-cab drivers, from credit-counselors to plumbers, jobs will be matched using hyper-connected networks.

Long-term employment could come under meaningful attack from such forces.

Churn in mid-management of high-paying sectors can impact consumer demand

Sectors such as IT and BFSI have traditionally been large employers and high-paying sectors in India. A more cautious career path of the middle management in these industries will have a follow-on impact on consumer demand both for (1) staples and discretionary and (2) long-term assets such as houses and cars. This is delved into in greater detail in a later section.

Implications of excess supply of graduates

Kotak details thoughts on the broader implications of excess supply of graduate talent—

Wage revision to moderate. Wage increase in the IT sector has already moderated to high-single digits from low-to-mid teens historically. This could moderate further to mid-single digits. Wage revisions in the banking sector have also moderated considerably. Excess supply of graduates will feed into the entire pyramid over a period of time.
Move to just-in-time recruitment. Excess supply will give companies flexibility to recruit in line with requirements. This departure is already seen in the case of the IT industry: companies now recruit in first half of 8th semester (a graduate program in India has eight semesters over four years) from the sixth semester (18 months in advance) earlier. Just-in-time recruitment will drive following benefits for companies—(1) drive up utilization rates—this is feasible since excess supply will lower attrition rates, and (2) match-up of skill sets with demand. This could over time move to on-demand hiring of specific skill-sets.

Campus recruitment model will change. Kotak expects the fresher recruitment model to change to a mix of campus, off-campus and consolidated campus hires. Kotak believes that IT companies may restrict campus recruitment to comp. science or circuit branches. Kotak also believes that fresher salaries of Rs325K may remain unchanged for the next few years.

Expect invasion of trade unions in Indian IT. This may sound far-fetched but Kotak think of this as a near-term possibility. Unionization, however, will not be in the traditional sense but through self-help groups formed by people through social media platforms like Facebook and Twitter. Employees in India have been through the honeymoon period with easy availability of jobs, guaranteed promotions and pay hikes. However, weak economic environment over the past three years and increased competition have made it difficult for Indian IT companies to absorb wage revisions anymore without taking a hit on margins. Companies, under pressure to meet client demands of cost take-outs, are looking at ways to lower cost of delivery. This may be done through consistent churning of underperformers and raising the bar on delivery so that the employee pyramid and cost of delivery can be maintained. However, counseling out underperformers may not be easy if the next job is difficult to find.

Low salaries tend to percolate upward

Exhibit 6 shows the difference in the salary path in two different scenarios. In Scenario A, Kotak calculates the salary trajectory of a fresher who would have received normal increments of say, 10% p.a. and a 15% pay rise at every promotion (say, every 3 years). This shows that his pay at the end of 10 years would be 3.5X his starting pay. However, as Scenario B shows, if there is a glut of freshers compared to the demand, they (1) may be hired at a pay lower than what would have been the case earlier, (2) may not receive pay-hikes initially, (3) their promotion packages may not be as generous and (4) they may take much longer time to be promoted; all these add up to a meaningful loss in purchasing power during the tenure of the professional.

Kotak believe that as a large batch of not-so-well-paid freshers learn and grow in the system, they are more likely to impact the growth in pay of the seniors as the ratio of the pay-scales begins to look distended. It is quite possible that low-growth industries may see a correction in the salaries of the seniors – and this can have quite a meaningful impact on the consumption dynamics. It is well-accepted that as incomes increase, they tend to get spent on discretionary items; a fall in incomes can impact this spend meaningfully.

The willingness and ability to finance capital expenditure, for example, say houses or cars, may also be significantly impacted. In a scenario where salaries are growing, the proportion of EMIs to monthly take-home pay begins to get smaller every year; if salaries stagnate or are expected to fall, getting into fixed, long-tenure EMIs, may not be prudent, either for the customers or for the banks.

This is not a Luddite argument: jobs will be created in other sectors

Kotak highlights that the implications for organizational changes that Kotak refers to will mainly impact the existing organizations where a pyramid structure exists. New jobs continue to be created across sectors and the digital/e-commerce sector itself is expected to throw up many employment opportunities (see Exhibit 7). Kotak notes that these projections may be subject to meaningful revisions if the employment structure were to alter as Kotak anticipate.

By Kotak Institutional Equities

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