Indian Wages Amongst Most Competitive in Manufacturing Asia

June 12, 2014 Posted by India Briefing Reading Time: 4 minutes

Op-Ed Commentary: Chris Devonshire-Ellis

The wages of Indian workers have come out as some of the best in terms of value when compared to their counterparts across the rest of Southeast Asia and China. With an existing labor pool of some 400 million workers, India is also poised to reach a development ‘sweet spot’ – with millions of young Indians pouring into the domestic labor pool over the next decade. By 2025, it is estimated the available Indian workforce will have overtaken that of China and reached some 900 million Indians. Partially as a result of not having, as China does, a one-child policy, this means that the availability of a young workforce should allow the government to formulate direct investment policies that enable companies to take advantage of this huge pool of labor.

When comparing minimum wages across the main Asian manufacturing destinations, and adding in the mandatory social welfare costs, the average minimum salary comparisons show that Indian labor is available at 22 percent of the price of their Chinese counterparts.

The chart above, which displays the average figures for each country, represents the overall spread of labor costs for semi-skilled labor across Asia. At the senior executive level, India begins to rise to the top of the charts in executive pay – a reflection of the more internationalized education and expertise of educated Indians.

The development of an inexpensive and young labor pool in India will have profound implications for global manufacturing over the next two decades. Just as China has over the past two decades, if the new government can get its investment policies right, cut down on bureaucracy, reduce foreign investment barriers and push through a better balanced tax regime, then this labor pool will be able to work. In turn, this will create wealth in India and will also see a large chunk of the global supply chain move to the country.

The Indian wage dynamic also comes at a crucial time for the projected emergence of middle class consumers throughout Asia. This is also expected to rise at exactly the same time that India is able to provide an inexpensive and young source of labor.

China’s middle class consumer base is expected to rise to 600 million in the next seven years from 250 million today, while that in ASEAN – with which India has a Free Trade Agreement – is also expected to rise to 200 million from 125 million during the same period. This is a middle class consumer base increase of some 375 million right on India’s doorstep. India’s middle class consumer base is also expected to rise, albeit it at a slower pace, as the country needs to absorb the large numbers of Indian labor entering the employment pool. India’s middle class is expected to reach 400 million by 2025, up from 250 million (the same size as China) today. The implications of these two demographic developments are good news for India. It is also clear that this is not just the “Chinese Century” but essentially an Asian one. India’s FTA with the ASEAN nations has reduced import duties to zero on 90 percent of all products traded between India and ASEAN. Using India as a manufacturing base to reach out to the growing ASEAN consumer market is a sound strategy.

While the availability of inexpensive Indian labor is welcome news for the Global Supply Chain, and manufacturers around the world, there remain issues with infrastructure. India still needs to spend large amounts of money to fix its infrastructure development issues. However, this too is measurable. Using China as a benchmark, it is a general rule of thumb that if production levels can reach 70 percent of that achieved by a China facility, it makes economic sense to place additional manufacturing capacity into the cheaper labor pool. Another two factors are certainties when examining these economic influences: China’s labor costs will continue to increase, while India’s infrastructure gap will narrow over time.

The implications are that it is time for global manufacturing businesses to start examining India. It has begun – the American auto manufacturer Ford has recently placed its Asian manufacturing hub in Gujarat. The new BJP Government has a tremendous demographic opportunity to steer India into wealth creation and prosperity over the next two decades. Now is finally India’s chance to show that it too, like China, can be the workshop of the world and export “Made in India” labels around the globe.

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email india@dezshira.com or visit www.dezshira.com.

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