The broad range of measures followed by Indian companies in the last year or so has ranged from cutting down on travel costs, cutting or freezing recruitments and employee bonuses

With the Indian economy taking a beating on almost every macro indicator, companies are feeling the heat. Austerity is the new buzzword in corporate circles. With the India growth story being suspended, companies are turning their attention to cost-cutting measures to survive the slowdown. Thus the term ‘austerity’, which in the current context, had its origin in the macroeconomic developments in the developed world, particularly the EU countries, has entered corporate lexicon.  However, the macroeconomic prescription of austerity – widely debated academically, especially in the wake of the errors found in the 2010 work of Kenneth Rogoff and Carmen Reinhart – has been rejected by the masses in most EU countries. Understanding the mass angst, Italian Prime Minister, Enrico Letta, has spoken about moving away from austerity policies that ‘were no longer sufficient’, while Iceland too has rejected the austerity mandate recently. The writing on the wall is clear for these leaders: Bid au revoir to austerity or be damned!

The austerity issue, however, has wider ramifications than government-led macroeconomic measures. Are there lessons that Indian corporate entities can draw from these macroeconomic developments? Can the mass rejections of the ‘economic sense’ underlying austerity programmes hold behavioural lessons for Indian corporate entities emulating and implementing such macro-prescriptions of austerity?

Following President Pranab Mukherjee’s budget speech of 2012-13, (“….. I am going to announce some sort of austerity measures…..whether people like it or not……..to convey a signal that we are responding to the situation.”), public sector companies such as the ONGC, BHEL, SAIL, NTPC and Indian Oil were instructed to restrict foreign travel and expenditure on hotels. The Indian private sector, rising and ‘responding to the situation’, and mirroring the broad macro-sentiment, went about a belt-tightening exercise as well.  The broad range of austerity measures followed by Indian companies in the last year or so has ranged from cutting down on travel costs, cutting or freezing recruitments (including a hiring freeze by the government on civil service) and employee bonuses; periodic plant closures, streamlining spare parts, material procurement and cutting down on advertising spend.

While some of these measures may be warranted, nay unavoidable, to survive during tough times, the costs of austerity (both tangible and intangible) need to be carefully assessed. Also, one needs to understand the behavioural premise underlying some of these cost-cutting measures. As Paul Krugman (Mint, April 26, 2013) rues, “The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigour. What the top 1% wants becomes what economic science says we must do.” Could it be that Indian corporate austerity agenda is way off the mark, expressing the preferences of the ‘top 1 per cent ’? How much did such cuts contribute towards reduction in corporate expenses?

A perusal of the P&L statements of India’s top 50 companies for 2012 reveals that 20 companies have experienced a decline in the PAT over the previous year or even losses, driven by growing expenses (rather than declining revenues). It would be pertinent to analyse in-depth the reasons for such decline/losses. Considering that most companies have gone in for cost-cutting measures, it seems paradoxical that attempts at cost-cutting have in fact, led to greater costs.

We may suggest at least three behavioural reasons (Kahneman & Tversky) why such cost-cutting measures may not make sense to the majority employees at the receiving end of such austerity cuts. Workers tend to overvalue the prospect of losing something of value and undervalue the prospect of gaining something of value (Loss Aversion Bias). Hence their losses are valued greater than the company’s gains on account of austerity, resulting in rejection of such measures. Again, people prefer no change, especially where complex choices have to be made (Status Quo Bias) leading to middle and lower management, resenting their perks being cut. Finally, people have deep rooted value systems and selective filters (Value System Bias). Substantial evidence to the contrary is required before behaviour changes in a way that is inconsistent with deeply-held beliefs (e.g. bonuses are meant to be paid during Diwali). These biases, which help explain the seemingly ‘irrational’ behaviour of citizens of the EU countries towards ‘saviour’ governments may well be applicable to Indian corporate.

The agenda for austerity cannot be driven ‘bottoms up’. Behavioural solutions to enforcing austerity may lie in the top management agreeing to take salary cuts (as opposed to no salary raises) during difficult years, finding ways and means of getting the best bargains on travel and entertainment spends, compensating (or even over-compensating) workers with variable ‘delight’ components during difficult periods,  rather than trimming the lower layers/ essential spends. Again, a culture of cost-control needs to be inbuilt into the organisation during the good times, so that superficial attempts at cost-reduction do not have to be forced on during the bad times.

Macro developments in the Western world may hold key lessons for their micro counterparts in India, viz. the Indian corporate. To make a difference, you have to be able to survive. India Inc. might do well to follow carefully the story as it unfolds, so as to draw valuable lessons for their own action agenda. Prudent cost-management and cost-optimisation, rather than cost minimisation/cutting may be better options to be exercised.

Au revoir, Austerity!  Tulsi Jayakumar is a Professor at the SP Jain Institute of Management & Research, Mumbai.

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