H1B visa reforms: 5 levers Indian IT firms can pull to soften the blow

After congresswoman Zoe Lofgren introduced the H1B reforms bill in the US House of Representatives, IT executives and investors in India have been worried about its impact on the country’s outsourcing sector, which is highly dependent on H1B visas to provide services at a relatively low cost.

The new minimum wage proposed by the bill could make H1B payscales even higher than local the payscale, making it economical for the companies to hire locally, but denting their margins significantly. More importantly, it’s seen as the begining of a series of protectionist measures that would make getting business from the US increasingly more difficult. (Yet another proposal, Reforming American Immigration for Strong Employment, or Raise Act, seeks to cut legal immigration by half.) What can Indian IT companies do to tide over these tough times? They have at least five levers at hand, which come with varying levels of difficulty.

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1. Move more work offshore

Offshoring not only reduces regulatory burden, it is also cheaper. But, moving work offshore will not be easy, especially with new clients. They tend to prefer onsite work to gain confidence before moving work offshore. However, it’s not impossible. Infosys has been bringing onsite component down in the recent quarters. Among the tier one players, Tata Consultancy Services (which stopped sharing this metric after March 2015), Cognizant and Wipro have bigger scope for moving more work offshore.

2. Look Beyond the US

America continues to be the largest market for India-centric outsourcers. While companies have made some progress in expanding their businesses in Europe, the next big market, knowledge of local languages has been a constraint (except for United Kingdom). However, many recognize exploring other markets in Europe, South America and Asia is a key to long term success, and even survival. Visa reforms in the US will push Indian IT firms to move in this direction.

3.Increase utilization rates

IT companies tend to include unbilled employees (people who are assigned to a project, but not charged for) in ongoing projects to provide a cushion, and for projects in the pipeline so they can hit the road running. So, the utilisation of resources is never hundred percent. Utilisation rates, measured as a percentage of total employees, could vary from quarter to quarter depending on hiring season (when IT companies onboard a large number of freshers) and sales targets. However, with a broader base of employees and efficient allocation of resources, it’s still possible for IT companies to improve utilisation rates. It would help in compensating for the higher wages onsite.

4.Increase revenue per employee

Indian tech majors, including TCS and Infosys, have been talking about non-linear revenues for several years now. However, revenue per employee has remained more or less constant. What once seemed like a good thing to purse, increasingly appears to be a necessary thing to do. As in the case of increasing non-American revenues, it cannot be achieved overnight. It would demand more investment in automation, and in products and platforms. Such investments could result in lower margins and demand a higher risk appetite. This is the direction that the management would push their companies going forward.

5.Look for low-cost resources

Recent surveys by Mercer, as well as Willis Towers Watson, indicated that salaries in India are set to increase by 10% in 2017. IT sector, which has paid some of the highest salaries across sectors, has also seen higher than average pay hikes. However, increasingly, IT companies are setting up centres in smaller cities and towns to benefit from lower rents, and to hire employees at lower salaries for specific kinds of work. Salaries account for roughly 70% of cost of sales, and reducing it could have significant impact on margins.

(Notes: All data sourced from respective companies’ financial statements. Some companies don’t publish onsite / offshore break-ups, or have stopped publishing in the last few years)

 

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News in Numbers, Nov 17, 2016: Silent killer…

199 million

What is it? The estimated number of Indians who suffer from high blood pressure, according to a study published in the medical journal Lancet.

Why is it important? This is 17.6% of the total number of people suffering from high blood pressure globally (1.13 billion in 2015), which has doubled from 594 million in 1975. Raised blood pressure or hypertension is the leading global risk factor for kidney disease and cardiovascular disease (leads to strokes and heart attacks and causes an estimated 7.5 million deaths globally). The highest worldwide blood pressure levels have shifted from high-income countries to the poorer ones (mainly in South Asia and sub-Saharan Africa) in the last four decades.

Tell me more: The analysis is based on 1,479 studies that measured blood pressure in 19.1 million individuals aged 18 years and above. Over 2 out of every 10 people with hypertension are in South or East Asia.

 

36

What is it? The number of hours within which search engines run by firms including Google, Yahoo and Microsoft have to bring down information or advertisements related to pre-natal sex determination once they are brought to their attention, according to an order by the Supreme Court.

Why is it important? The apex court directed the government to set up a nodal agency to monitor and act on public information received on ads promoting sex determination techniques or kits on the Internet. Pre-natal sex determination is illegal in India though this direction could raise questions such as the role of search engines and if it is possible to screen and remove all information related to a particular topic. However, this is an interim arrangement and would continue until the top court takes a final decision on the issue.

Tell me more: As per the Census 2011 data, India’s population ratio was 943 females for every 1,000 males, up from 933 females per 1,000 males in 2001. However, the decline in child sex ratio (number of girls per 1,000 boys) to 918 in 2011 from 927 in 2001 is a cause for concern. This is the lowest since 1961.

 

Rs 7,016 crore

What is it? The amount of loans written off by the State Bank of India owed to it by 63 wilful defaulters.

Why is it important? This includes the amount owed by the now defunct Kingfisher Airlines, whose founder Vijay Mallya slipped away to London in March even as lenders and investigating authorities are chasing him for non-repayment of his companies’ dues and alleged financial irregularities. Some of the opposition parties including the Congress, the Aam Aadmi Party and CPI (Marxist) used this point to attack the government, which has been facing flak from them over its demonetisation move. SBI and the government clarified that these loans had only been written off and not waived off, and that efforts are on for their recovery.

Tell me more: The opposition has been attacking the government for the withdrawal of the old currency notes in Rs 500 and Rs 1,000 denominations terming it ‘anti-poor’ and alleged that it has inconvenienced the common man.

 

8-10%

What is it? The expected growth of India’s IT services industry in 2016-17, according to industry body Nasscom.

Why is it important? This is lower than the 10-12% (in constant currency terms) growth rate it had projected in February. This is the second time that Nasscom has predicted a single-digit growth for the industry in the last 10 years after it reported its lowest growth of 5% in 2009-10 due to the 2008 global financial crisis. The growth rates have been revised downwards following Donald Trump’s win in the US elections (he was quite vocal about his anti-immigration stance and putting restrictions on foreign companies that took away US jobs) and UK’s exit from the European Union.

Tell me more: Indian IT firms have been struggling to grow in the last few quarters with some of their results falling below the market expectations and a couple of them downgrading their own guidance. Indian IT exports are expected to be in the range of $116-118 billion, down from the earlier projection of $119-121 billion.

 

1.7

What is it? The total compensation in basis points (as a percentage of company net sales) paid to top executives (managing directors and chief executive officers) at the most indebted firms among 313 BSE-500 companies. A basis point is one-hundredth of a percentage point.

Why is it important? This is much lower than the 5.06 basis points paid to the top executives of the overall sample of 313 firms in the same year. Also, the growth in compensation to the people at the helm of the most indebted companies has been slower than that recorded for the total sample in the last four years. Interestingly, the salaries of the promoters leading the most indebted firms grew at a faster rate than those headed by non-promoter professionals while the growth of the overall top executive compensation at the most indebted firms was higher than the overall employee compensation in these firms.

Tell me more: The analysis, which excluded banks and other financial firms, divided the 313 companies into four quartiles based on their level of indebtedness. The total compensation includes salary, sitting fee, commission and any other payment, excluding earnings from exercise of stock options.

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Seventh Pay Commission payout: Finding the ‘missing $15 billion’ in Budget 2016

This piece originally appeared on Livemint.com

 

A Bloomberg report on Wednesday titled “Missing: $15 billion lost somewhere in India’s 1,500-page budget” raised a red flag on the Indian government’s balancing of its books in Budget 2016. It pointed out how the global financial data provider and other analysts were unable to locate the numbers allocated for implementing the recommendations of the Seventh Pay Commission (SPC), which doles out the once-in-10-years pay hike given to central government employees. The allusion was the government may have understated this payout—and, by extension, its deficit.

We tried to locate those “missing” numbers in the same budget documents. First, we need to know how much it will cost the government to implement the SPC recommendations. The estimate for 2016-17 by the SPC is a 24% increase in payouts to government employees, or Rs.102,100 crore (around $15 billion).

 

g_mission1_web

 

The first place to look for is under non-plan expenditure, and a table titled “Estimated strength of establishment and provision thereof”. This details how many employees are there in 56 government departments (excluding defence) and how much the government has budgeted to pay their salaries: an increase ofRs.65,690 crore in 2016-17. Thus, we have accounted for around 65% of SPC’s impact.

 

g_mission2_web

 

The second place to look for is pensions, the details of which are again provided under non-plan expenditure. This shows the government has budgeted for an increase of Rs.37,066 crore.

 

g_mission3_web

 

Thus, the total increase in salary and pension bill in 2016-17 is Rs.102,756 crore. However, there is one rider. The pension liabilities include increased outgo on account of implementing the One Rank One Pension (OROP) scheme.

Implementing OROP is estimated to cost the government Rs.7,500 crore. Deducting this amount means the government has budgeted Rs.95,256 crore to meet SPC recommendations. In other words, the net shortfall in budget estimates on account of implementing the SPC is Rs.6,844 crore.

What’s “missing” is $1 billion and not $15 billion.

 

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7th Pay Commission: How big is the opportunity and where the gains will be delivered?

This piece originally appeared on Livemint.com

 

For the 3 million-odd central government employees, the Pay Commission is a decadal harbinger of hope, outlining their salary increments for the next 10 years. For consumer-facing businesses, especially makers of automobiles, consumer goods, electronic items and houses, it’s a window of opportunity to tap the greater disposable income in the hands of the staff of India’s largest employer.

They are looking at one such imminent opportunity, with the release of the report of the Seventh Central Pay Commission last month. Just how big is this opportunity? How is it spread across various categories of employees? And where are the large pockets?

An estimate of all three facets can be made by juxtaposing data from two reports. The first is the latest Pay Commission report. It gives salary details of the old pay buckets of central government employees, their reorganization into a new pay matrix and the salary increase in each.

The second report is the latest census of central government employees. Although released in 2014, it provides data as on March 2011, counting 3.1 million employees. It gives details of 1.45 million such employees in 73 Indian cities, or 47% of all government employees. Crucially, it breaks up this 1.45 million by their old pay buckets.

For these 1.45 million employees, we used these two data sets to work out their current salary and new recommended pay, and thus their increment. Further, we classified them under three categories: Group A (estimated salary range: Rs.56,000 toRs.3.1 lakh), Group B (Rs.44,000 to Rs.2.08 lakh) and Group C/D (Rs.22,000 to Rs.1.14 lakh).

We estimate that if the Seventh Pay Commission recommendations are implemented, these 1.45 million employees in 73 cities will see their collective salary increase by Rs.22,932 crore, or about 21%. Even within this set, the top 25 cities account for 80% of central government employees and 82% of estimated salary gains. Put another way, these 25 cities account for 38% of the potential Pay Commission gains.

Use the visualization below to see how many central government employees are there in each of these cities, how they break up by various groups and how much they stand to gain from the Seventh Pay Commission.

 

Methodology

The starting point was the way government salary is structured. Broadly, there are three components: pay band, grade pay and allowances. At present, there are four pay bands and 15 levels of grade pay.

Current salary framework

The first pay band is Rs.5,200-20,200. Within this, there are five grade-pay progressions: 1,800, 1,900, 2,000, 2,400 and 2,800. For example, Mr X got a job at this pay band. His basic pay would be Rs.7,000 (Rs.5,200 derived from the pay band and Rs.1,800 as grade pay).

If he stays in the same designation, he would progress within a particular grade pay, with an annual increment of 3%. If he gets promoted, he would still be in same pay band, but will get a higher grade pay of Rs.1,900. In other words, to check the seniority of a government employee, ask their grade pay. The grade pay ranges from Rs.1,800 for Group C employees to Rs.10,000 for Group A officers.

The sum of pay band and grade pay is basic pay. Most allowances, notably dearness allowance (DA) and house rent allowance (HRA), are calculated on basic pay.

The Seventh Pay Commission assumed current DA of 125%. So Mr X would receive Rs.8,750 per month as DA (125% of Rs.7,000). The HRA quantum varies across cities. If Mr X lived in Delhi, he would get an HRA of 30% of basic pay, or Rs.2,100 per month.

Thus, the sum total of Mr X’s salary is Rs.17,850: Rs.7,000 basic pay, Rs.8,750 DA and Rs.2,100 HRA. This is the lowest possible salary in central government service today.

New salary framework

The Seventh Pay Commission has recommended doing away with the system of pay band and grade pay. In its place come 18 levels, with 1 being the lowest and 18 the highest (cabinet secretary). Broadly, the 15 grade pays are matched with different levels. For example, grade pay of Rs.5,400—what an entry-level Group A officer would get—is now level 10.

The yearly increment is now called pay progression. For each level, the number of pay progression possible ranges from 1 to 40. If he doesn’t get promoted, Mr X will move from 1 to 40 over the next 40 years.

The 18 levels, representing a hierarchy, are arranged horizontally. Pay progression is arranged vertically. The combination of these two is the pay matrix, with 18 columns and 40 rows.

Salary increase

The Pay Commission combined the current basic pay and DA to derive the new basic pay. Next, it increased salary by 16% on this new basic pay. This amounts to 2.57 times the current basic pay. For Mr X, the new basic pay would be Rs.17,990, as compared to Rs.7,000 now. On top of this will be new HRA, calculated at 24% of basic pay.

Basic pay: Rs.7,000 (current); Rs.17,990 (recommended)

DA: Rs.8,750 (current)

HRA: Rs.2,100 (current); Rs.4,318 (recommended)

Total: Rs.17,850 (current); Rs.22,308 (recommended)

Mr X, because of the Seventh Pay Commission’s recommendation, will now see a 25% increase in salary.

Increase for 73 cities

Now that we know the different levels of earnings of government employees, the next step is to estimate the number of employees at each of the different levels in different cities.

For this, we tapped the Census of Central government employees. Although released in 2014, it shows data as on March 2011, counting 3.1 million employees. This contained details of how many central employees were there for 73 cities. Further, in each of the cities, there were details of the number of employees in each grade pay.

We matched this data with the pay matrix suggested by the Seventh Pay Commission. Multiplying the number of employees at each grade pay will give the total salary bill, sliced for each city and for different levels.

We made two assumptions:

1. City-wise age data was not given. So, we took the age break up for all central government employees from the Pay Commission report, and applied it across cities. There were four age groups (20-30 years, 30-40 years, 40-50 years and 50-60 years). We divided pay progression (of 40 steps) for each level into four equal groups.

So, in level 1, we averaged the first 10 steps in the pay progression, and assigned this amount to 20-30 years. Approximately, 22% of employees are in 20-30 years. The total number of employees was multiplied by 0.22. Multiplying the two numbers gave us the salary bill for 20-30 year olds in level 1. We repeated this for other age groups and across levels.

2. The second was related to the sole grade pay band applicable both Group B and Group A employees; we assigned equal employees to both groups. Further, in some cases, Census data has given one employee count by combining two grade pay. Here, we apportioned half the employee count to each grade pay.

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