We hear of complaints of a serious labour shortage almost every day. IT and BPO managers complain of the high attrition rates in their sectors; the non-IT manufacturing sector complains of the brain drain to the IT sector, with engineers and science graduates opting for IT over other, less glamorous jobs; the education sector complains of being starved of good people and the explosion of new TV channels and even newspapers have led to massive shortage of personnel in the media as well.

These shortages have led to a sharp rise in salaries. As the table indicates, RBI data for private sector non-financial companies show that the growth in staff costs has gone up from 6.6 per cent in 2001-02 to a huge 31.4 per cent in the first half of the current fiscal. Notice the progressive acceleration in the growth in staff costs, an indication of the shortage of good workers.

However, companies have not been affected by the rise in staff costs, simply because the increase in sales has been more than the rise in staff costs. But salaries are rising more than other costs. Staff costs as a percentage of total expenditure has gone up from 7.3 per cent in 2001-02 to 9 per cent in the first half of 2006-07.

Inspite of the growth in wages and salaries, the growth in profits has been far more spectacular. At the macro level, that has led to an increase in corporate savings and investment, which has in turn led to high GDP growth.

Ulip trend

The booming stock markets have left their mark on the insurance sector. During April-November 2006, unit-linked insurance plans (Ulips) accounted for half of total premiums. For private sector insurers, the share of Ulips in their total new premium was a huge 87 per cent.

One reason for the popularity of Ulips, argues investment bank Merrill Lynch, is because they have delivered better returns than most mutual funds over the long-term.

A Merrill Lynch report says that, because of the higher initial load for ULIPs, mutual funds perform better for shorter periods of 5-6 years. Beyond that, the low annual asset management fees of the insurers, charged over a much larger corpus, leads to better performance by the Ulips. The result is that you not only get a better return but also a life cover thrown in. Merrill Lynch points out that because of the large corpus of the Ulips, the actual cost of the life cover to the insurer works out to only 0.25 percentage points.

What’s more, single-premium policies, which are the best comparison to mutual funds, do better than mutual funds even in the short term. That’s because while loads on single premium policies are similar to entry loads on mutual funds, the asset management charges are lower. Over a fifteen-year period, the difference could be as high as 0.50 percentage points per year.

However, Merrill Lynch also points out that the lower management fees could result in insurers being unable to hire the best talent in the market, leading to lower returns. Also, the biggest disadvantage of Ulips is their three-year lock-in period, which prevents investors from cashing out in case there’s a decline in the markets.