Managerial Economics

06 Jul

CASE – 1   Power for All: Myth or Reality?

The power sector in India is undergoing rapid changes especially for the last few years. The Government has promised “Power for All” by 2012. The growth of power sector in India has been consistent. From a humble beginning of 1,700 MW in 1950-51 to 1,18,400 MW in 2004-05, the development of power sector has traveled a long way. There has been quantum rise in thermal power generation in 1970-71, 1980-81 and 1990-91 and greater rise in hydro electric power production since 2000-01. The government is promoting clean source of energy, i.e. hydro electric power. The sectoral outlay for power in successive five year plans has consistently been increasing. However, it has increased at a faster rate from sixth five year plan, i.e., 1980-85 onwards.

The following table gives the pattern of consumption of electricity on the basis of consumer segments.

Pattern of Electricity Consumption (Utilities)


year Domestic Commercial Industry traction agriculture others
1950-51 12.6 7.5 62.6 7.4 3.9 4.0
2000-01 23.9 7.1 34 2.6 26.8 5.6
2004-05 24.8 8.1 35.6 2.5 22.9 6.1

However, industry has shown decreasing trend of electricity consumption whereas irrigation has shown increasing trend, which is a positive sign for our agriculture. The ‘commercial’ and ‘traction’ sectors have no conspicuous fluctuation pattern in their electricity consumption.

The State of Uttar Pradesh is the largest in India. It has a population of over 166 million (Census 2001). If Uttar Pradesh were to be a country, it would be the 7th largest country in the world. In some of the social and income indicators, the State has made rapid progress. It is one of the largest software exporting states in the country and has led India’s BPO (Business Process Outsourcing) boom in the last few years. The growth rate in software export of U.P. is the highest among all States (GOUP Policy 2003). The State has a cross-cultural milieu of population with diversity of customers, markets and buyers. It has satellite towns like Noida, Ghaziabad, Greater Noida, etc. that are emerging as new industrial hubs; therefore there is growing demand for infrastructure facilities like power, transport, health, education, road, shopping malls, multiplexes, etc. in these cities.

The power situation in the State of Uttar Pradesh is that of deficit, i.e., demand exceeds the supply and generation of power. Uttar Pradesh has electricity generation capacity of 4000 MW against demand of 6500 MW of power. Recognizing the demand-supply gap at the national level, the Government of India through Electricity Act 2003 is implementing a ‘Power-for-All’ plan, under which 1,00,000 MW of new installed generating capacity is to be added by the year 2012.

Even with the present electrification levels, the additional capacity requirement for supplying continuous power in the State of Uttar Pradesh is 1,300 MW. For universal access the capacity requirements would be over 11,250 MW that would shoot up to over 14,200 MW, if U.P. (Uttar Pradesh) were to attain the national per capita consumption. Compared to this requirement, the availability in 2009 would be just 8,650 MW as per present estimates, if all planned projects fructify (Power Policy 2003, GOUP).

The situation has been further exacerbated due to state reorganization in 2000. Prior to this U.P.’s hydel capacity was 1497 MW and thermal capacity was 3909 MW. Subsequent to reorganisation, U.P. retained only 516 MW of low cost hydel power, while the balance hydel capacity has been allocated to Uttaranchal. The cost due to the unavailability of cheap hydel power which has since gone to Uttaranchal is Rs 400 crore.

U.P.’s ability to supply power to its consumers is limited by the financial capacity of State power utility (UPPCL) to purchase power, especially after the securitisation of power purchase under the Expert Group recommendations that mandates regular payment of current dues. There is a vicious cycle of poor recovery, leading to the poor quality of UPPCL to purchase power and attract investments, leading to poor quality supply even to the remunerative consumers, resulting in these consumers moving away from the grid. It has resulted in a further deepening of the financial crisis and its concomitant result of poorer quality of supply.


1. What are the factors responsible for this excess demand for electricity?

2. The demand supply gap is reformed by the government intervention. Explain this phenomenon by a demand supply model.

3. What do you think will happen to the price of electricity?


CASE – 2   Automobile Industry in India: New Production Paradigm

The Industry

The automotive sector is one of the core industries of the Indian economy, whose prospect is reflective of the economic resilience of the country. The automobile industry witnessed a growth of 19.35 percent in April-July 2006 when compared to April-July 2005. As per Davos Report 2006, India is largest three wheeler market in the world; 2nd largest two wheeler market; 4th largest tractor market; 5th largest commercial vehicle market and 11th largest passenger car market in the world and expected to be the seventh largest by 2016. India is among few countries that are showing a growth rate of 30 per cent in demand for passenger cars. The industry currently accounts for nearly 4% of the GNP and 17% of the indirect tax revenue.

The well developed Indian automotive industry produces a wide variety of vehicles including passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles, scooters, motorcycles, mopeds, three wheelers, tractors etc. Economic liberalisation over the years has made India as one of the prime business destination for many global automotive players, including international giants like Ford, Toyota, GM and Hyundai have also made their presence with a mark.

As per another report, every commercial vehicle manufactured, creates 13.31 jobs, while every passenger car creates 5.31 jobs and every two-wheeler creates 0.49 jobs in the country. Besides, the automobile industry has an output multiplier of 2.24, i.e., for every additional rupee of output in the auto industry, the overall output of the Indian economy increases by Rs. 2.24.

The India automotive sector has a presence across all vehicle segment and key components. In terms of volume, two wheelers dominate the sector, with nearly 80 per cent share, followed by passenger vehicles with 13 per cent. At present, there are 12 manufacturers of passenger cars, 5 manufacturers of multi utility vehicles (MUVs), 9 manufacturers of commercial vehicles (CVs), 12 of two wheelers and 4 of three wheelers, besides 5 manufacturers of engines.

Table:   Vehicle Segment-wise Market Share (2005-06)



Percent Share


Commercial vehicles


Passenger vehicles


Two Wheelers


Three Wheelers





Source: Report of Society of Indian Automobile Manufacturers (SIAM), 2006.

Although the automotive industry in India is nearly six decades old, until 1982, there were only three manufacturers – M/s Hindustan Motors, M/s Premier Automobiles and M/s Standard Motors in the motorcar sector. In 1982, Maruti Udyog Ltd. (MUL) came up as a government initiative in collaboration with Suzuki of Japan to establish volume production of contemporary models.

The Company

Maruti Udyog Ltd. (MUL) has become Suzuki Motor Corporation’s R&D hub for Asia outside Japan. Maruti introduced upgraded versions of the Esteem, Maruti 800 and Omni, completely designed and styled inhouse. This followed the upgradation of WagonR and Zen models, done inhouse only a year before. Maruti engineers also worked with their counterparts in Suzuki Motor Corporation in the design and development of its new model, Swift.

The company launched superior Bharat Stage III versions of most of its models, well before the Government deadline. Maruti also set up a Centre for Excellence with a corpus or Rs. 100 million. This was done in collaboration with suppliers, who contributed an additional Rs. 50 million. The Centre provides consultancy and training support to Maruti’s Suppliers and Sales Network to enable them to achieve standards in Quality, Cost, Service and Technology Orientation.

Maruti has embarked upon this new project in collaboration with SMC for the manufacture of diesel engines, petrol engines and transmission assemblies for four wheeled vehicles. The project is being implemented in the existing Joint Venture Company viz. Suzuki Metal India Limited (renamed Suzuki Powertrain India Limited).


1. Identify the most important factors of production in case of automobile industry. Also attempt to explain the relative significance of each of these factors.

2. What more information would you like to obtain in order to draw a production function for Maruti Udyog? Explain with logic.

3. Automobile industry is a good example of capital augmenting technical progress. Discuss.


CASE – 3   Indian Cement Industry: Riding the High Tide

India is the second largest producer of cement in the world, just behind China. Indian cement industry comprises of 130 large cement plants and 365 mini cement plants with installed capacity of 172 million tonnes per annum (mtpa); these plants are located in states like Gujarat, Rajasthan and Madhya Pradesh. The large cement plants accounts for over 94 percent of the total installed capacity. However two large groups, viz. the Aditya Birla Group and the Holcim Group; together control more than 40 per cent of total capacity. This apart, more than 25 per cent of total capacity is controlled by global majors. These include Lafarge of France, Holderbank of Switzerland and Cemex of Mexico. The Indian cement industry is characterised by takeovers and acquisitions, which contributes to gaining market power and thus enables companies to enjoy pricing power, which is typically oligopoly.

Cement: Output and Consumption

India accounts for 6.4% of global production of 2.22 billion tonnes of cement. Indian cement industry has grown in terms of installed capacity and production. Cement production increased by over 9 per cent in FY2007, reaching 154.74 mtpa, in comparison to 12.40 per cent in FY2006, 7.07 in FY2005 and 5.19 per cent in FY2004. Decade-wise, Indian cement production has increased at 8.2 per cent (CAGR) during FY1996-2006, as compared to 6.9 per cent during 1986-1996.

Cement consumption in India has increased by more than 10.53% during FY 2007 to 148.41 mtpa compared to 134.27 in FY 2006. During the decade 1997-2007, the cement consumption has increased by 8% at 10 yearly compound annual growth rate (CAGR). The changing face of Indian demography, growth of nuclear families, higher disposable income, changing pattern of spending, easily available home loans, increased urbanisation and growth of metro and semi-metro cities are some of the vital factors behind a tremendous spurt in the housing sector. In order to keep pace with an optimistic rate of economic growth, there is a rising demand for commercial and retail space, IT Parks and SEZs. Another recent trend has been initiated by the Government, with increase investment in infrastructure, like National Highway Development Projects. It is expected that a construction opportunity of over Rs. 7.6 trillion will be created over next five years.

Apart from meeting the entire domestic demand, the industry is also exporting cement and clinker. The export of cement during 2001-02 and 2003-04 was 5.14 million tonnes and 6.92 million tonnes respectively. Export during April-May, 2003 was 1.35 million tonnes. Major exporters were Gujarat Ambuja Cements Ltd. and L&T Ltd.


Cement industry has been decontrolled from price and distribution on 1st March 1989 and de-licensed on 25th July 1991. During last four years (2003-2007) cement prices have gradually increased from around Rs 150 per bag to Rs 230 per bag in 2007. Cement manufacturers control over market can be gauged by the fact that even 20-25% freight hike was straight passed on to consumers. Average industry ROCE has reached more than 26% due to the recent burst in cement prices. Encouraged by such lucrative returns cement manufacturers have decided to increase capacity by more than 97 million tonnes over next three years of which 43.7 million tonnes is likely to complete in FY 2009. Thus, the cement supply will increase by more than 11% in next three years.

Cement consumption growing at around 10% and production at 11% would naturally create a situation of over production. As per estimates, cement industry will face over capacity of 17.7 mtpa in 2008 and 37.7 in 2009. Therefore it is expected that capacity utilisation will fall significantly. Further new players are likely to join the industry with huge production capacities.


1. Do you think cement industry in India presents a good explanation of oligopoly? Which characteristics of oligopoly do you find in the above case?

2. How has decontrolling of cement prices helped the growth of this industry?

3. Do you see possibilities of cartel or implicit collusion in the above case? How?


CASE – 4   From Wages to Packages: the Journey of Software

Organisations across all industries are undergoing a shift in emphasis from tangible resources to valuable, rare and inimitable human resource in order to attain competitive advantage. Many leading organisations have started adopting an investment perspective towards their employees by moving from a traditional wage and salary system to compensation “packages”. The underlying reasons behind such a change include ensuring a motivational climate, encouraging efficiency and productivity for attainment of strategic goals, and gaining control over labour costs.

Wage and salary system bears a strong relationship with the performance, satisfaction and attainment of goals of the employees of a firm. This has prompted companies to start offering full packages of monetary and non monetary rewards as compensation or wage/salary to their employees.

Dimensions of Compensation

Compensation affects a person economically, sociologically and psychologically. It also compensates for the opportunity cost and real cost occurring to the specific type of human resource in being in the present context. Proper management of compensation helps a firm procure, maintain and retain a productive workforce.

A sound compensation package should encompass factors like adequacy of wages, social balance, supply and demand, fair comparison, equal pay for equal work and work measurement. The concept of adequacy can be disintegrated into two components: internal and external. The internal component can be linked with the concept of fair wages; it is the money wage adequate for an employee to maintain a decent standard of living. External adequacy, on the contrary, is in relation to comparable jobs in the same industry(s) with the same skill-set required.

Besides the element of adequacy, compensation is instrumental in motivation. An equitable compensation package may increase employee motivation. Inequity, on the contrary, may motivate employees to take corrective actions, which may be harmful to the firm. Firms thus link compensation to performance appraisal to enhance motivation, and hence productivity. Compensation may also be looked upon as a controlling device to ensure that employees behave in particular manner. An organisation may choose to offer a higher package to a particular employee in order to allure another employee to perform better.

Compensation in Software

Let us now take you to the software industry, known in corporate history for adding new facets to realms of wage and salary administration. It is software that has introduced compensation as a multi-dimensional tool. Differentials in compensation packages among various levels of software professionals, focus on skill-based compensation, rewards essentially linked to performance and negotiability have all added new facades to compensation.

In a recently conducted countrywide comprehensive survey of salary, Businessworld covered aspects like costs, compensation and benefits across 12 sectors of the Indian economy. The survey had revealed an arbitrage between high employee salaries overseas, with the low cost workforce in India. It has also found human resource contributing the largest component, namely 44 percent of the industry’s total cost. The annual entry-level salary has been revealed to range from Rs. 3.21 lakhs in the western part of the country to Rs. 5.23 lakhs in the north.

The Businessworld survey has found that the weakening dollar has hit the margins of the Indian software industry, thus compelling software firms to rationalize on employee costs. As competition is intensifying, software organisations must focus on ‘added value’ of their employees, by encouraging them to increase their efforts and performance on a continuous basis. This can be achieved by an overhauling of the entire compensation packages, including basic salary, along with incentive systems (including increase in salary, performance bonuses, stock options and retirement packages). Apart from such core components, emphasis must also be given to redesigning non-monetary incentives like words of praise, special recognition, job security and autonomy in decision making. On the whole, all such parameters of compensation strategies should be directed towards providing the ability to reinforce desired behaviours, and also serve the traditional functions of attracting and maintaining a qualified workforce.


1. Which factors, according to you, are prompting organisations to adopt a package instead of traditional salary?

2. Do you think package compensation is more suitable in modern globalised business? Can you draw some lessons from marginal productivity theory?

3. Do you think that the case supports the efficiency wage theory or bargaining theory? Give arguments in support of your logic.


CASE – 5  India in Search of a Way to Harness the Inflation “Dragon”

India has seen high rates of inflation until the early nineties and faces its attendant consequences. Since mid nineties the priority for policy maker has been to bring inflation to single digit. Just like appropriate diagnosis is must for proper treatment, similarly an inquiry into the causes of inflation in the country is necessary. Today inflation is not merely caused by domestic factors but also by global factors. And that is natural, as the Indian economy undergoes structural changes the causes of domestic inflation too have undergone changes. The economy of India is growing at a satisfactory 8 to 9 percent a year. Therefore change in purchasing power of people is natural and when we take to national level, it is a huge amount. Given the size of population of India even a small increase of Rs. 100 in the per capita income would mean an additional aggregate demand worth Rs. 110 billion. This has put an extraordinary highly demand on various commodities.

What has further compounded the problem is the inflow of foreign investments, which is the natural fallout of globalisation. The excessive global liquidity has facilitated buoyant growth of money and credit in 2005-06 and 2006-07. For instance near-zero interest rate regime in Japan has encouraged people to borrow in Japan and invest elsewhere for higher returns. Obviously, some of this money, estimated by experts to be approximately $200 billion, has undoubtedly found its way into the asset market of other countries in alternative investments such as commodities, stocks, real estates and other markets across continents, leverage may times over. And India is emerging as an attractive destination. The net accretion to the foreign exchange reserves aggregates to in excess of about Rs. 225,000 crore in 2006-07. Crucially, this incremental flow of foreign exchange into the country has resulted in increased credit flow by our banks. Naturally this is another fuel for growth and inflation.

Further, the sustained flow of foreign money has fuelled the rise of the stock markets and real estate prices in India to unprecedented levels. This boom has naturally led to corresponding booms in various related markets as much as the increased credit flow has in a way resulted in overall inflation. As pointed out in the Economic Survey 2007-08, the current bout of inflation is caused by a multiplicity of factors, mostly monetary and global.

To conclude, it must be understood that growth naturally comes with its attendant costs and consequences. The government has been aiming at keeping inflation below 5% but it keeps on deceiving now and then. A stock market boom, a real estate boom and a benign inflation in consumer goods market in an economically impossible idealism. These are pointers to a need for a different strategy to handle inflation.

Reserve Bank of India’s strategy of Market Stabilisation Scheme (MSS) to dealing with excessive liquidity, the increase in repo rates to make credit over extension costly and CRR to restrict excessive money supply have limitation with such huge forex inflows.

While these policies are usually intertwined and typically compensatory, one has to understand that the issues with respect to inflation cannot be subjected to conventional wisdom in the era of globalisation. The Government has to find out some unconventional methods of controlling inflation besides focusing on timely implementation of infrastructure projects and improving productivity to fill demand supply gap. One such measure could be revaluation o Indian rupee against dollars.


1. What are the major factors contributing to inflation in India in the recent past? How have they changed since 1991-92?

2. What measures do you suggest should be taken up by government of India to handle inflationary pressure?

3. Evaluate the suggestion of revaluating Indian rupee against dollars to control inflation.

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