How Labor Market Intelligence Can Strengthen Your India Market Relocation Strategy

As global economies continue to recover and multiple concerns regarding the concentration of supply chains emerge, many businesses are actively considering their options for relocation. Asian economies have an upper hand, due to a mix of factors – lower costs, rapid industrial growth, availability of professional services, and locational advantages.

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India is emerging as a key contender in this regard, given its large market and consumer base, availability of labor, R&D capacity, presence of key logistics hubs, and the recent focus on upgrading its manufacturing ecosystem.

Multiple incentives are available to foreign investors and companies seeking to make greenfield and brownfield investments in the country. The structure of incentives, however, differs by industry, company size, location, and hiring commitments.

The case for local labor market intelligence

While India offers several low-cost advantages – finding the right combination of factors is important when narrowing down your choices for relocating your business. What this means is that businesses must gauge the pros and cons of each location in India, before finalizing where to set up.

Sometimes, choosing locations that do not offer key requirements like presence of a mature labor market in a specific sector or industry where the company operates or the absence of easy connectivity to key industrial and educational hubs, will neutralize the comparison process and the business may lose out on making a cost-effective decision.

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For instance, some manufacturing entities may find it suitable to tap into tier-2 and tier-3 cities or locate their investment at the outskirts of a major metropolitan city like Chennai or Bengaluru (formerly, Bangalore). Sourcing labor would not be problematic as they are mature manufacturing and research hubs, with strong logistics and a legacy labor pipeline. Moreover, wage costs and operation costs can be managed more effectively than if the business were to set up in the metro city.

Access to such on the ground information is why investing in local business intelligence studies, including labor market research, is necessary for foreign companies and investors strategizing their market entry, especially if the country is unfamiliar or highly diverse, like is the case with India.

Several states across the country offer a mix of incentives tailored to attract specific industrial set-ups, like information technology (IT), electric vehicle manufacturing, electronics investments, R&D operations, pharmaceutical research and manufacturing, etc.

Moreover, increasingly, states are opting for industrial policies that have a local hiring component – for example, companies must hire a certain percentage of locals or those with a local domicile address, as a mandatory compliance. Some states merely encourage this through tax breaks and financial incentives associated with cultivating local talent building and hiring from within the state’s human resource pool.

What is covered under a labor market study?

An effective labor market study will help company management, such as C-suite executives, grasp key factors as they finalize their market entry strategy. This includes objective assessment of competitiveness in terms of labor costs, which is a huge deciding factor in establishing where to locate a factory set-up. Another important factor is the availability of labor as per requirement, that is, skilled, semi-skilled, and unskilled labor. Further, the regional and industrial labor regulations and how complex or how friendly they are for foreign companies is a vital assessment that can pivot management to favor one location over another, despite other compelling incentives.

1. Wages: This includes minimum wages as well as average salary costs for specific positions. India offers the most competitive labor costs in Asia, but the calculation is complex. India has an average monthly wage of INR 32,840 (US$395), but the country’s minimum wage and salary structure highly varies depending on the following factors: state, area within the state based on development level (zone), industry, occupation, and skill-level. The monthly wage calculation includes the variable dearness allowance (VDA) component, which accounts for inflationary trends, and where applicable, the house rent allowance (HRA). Overall, this offers foreign investors a range of options when choosing where to locate their set up in India.
2. Social insurance obligations: This covers state laws, types of social insurance, and contribution rates. The social insurance costs may differ by industry and nature of jobs, such as whether the workers are engaged in hazardous work, etc. Generally, India’s social security schemes cover five types of social insurance: pension, health insurance and medical benefit, disability benefit, maternity benefit, and gratuity. These include not just an insurance payment of premiums into government funds (like in China), but also lump sum employer obligations. However, the applicability of mandatory contributions to social insurances is varied. Some of the social insurances require employer contributions from all companies, some from companies with a minimum of 10 or more employees, and some from companies with 20 or more employees.
3. Labor force size and related factors: This covers the working population, labor force participation rate, share of men and women in the labor market, and key demographic indicators. This intelligence is crucial and may reveal hidden costs when a foreign enterprise sets up in an area whose labor pool is not evenly distributed to suit adequate gender and age representation, which in turn affects the working environment and, in some cases, compliance expectations. Further, given that India’s manufacturing operations are generally labor intensive due to being relatively low-cost, many industries also pay attention to local ethnic and social identity factors when hiring – to ensure the company has a diverse labor force, which will also affect the bargaining capacity of both workers and management.
4. Skill level of labor: This category will provide information based on population enrollment in schools, colleges, as well as vocational institutes, besides identifying relevant education and specialization trends.
5. Attrition / drivers of turnover and employment growth: This includes identifying workforce trends in the region and sector, factors motivating local talents and popular job searches, and industry experience for typical professional occupations, such as duration of sticking with a company. For example, the information becomes pertinent in the IT-enabled services, healthcare, and industrial sectors, where companies invest in the training of their hires but may witness frequent turnover due to high competition in the area. This should ideally be accounted for in the market entry planning stage.
6. Labor laws: Information in this category includes the names and presence of industry and trade unions and their affiliations (political, independent etc.) as well as compliance related – contracts, termination regulations, hiring procedures. Some Indian states also have introduced labor legislation that mandates a quota for local hiring for certain types of roles, such as the state of Haryana, which notified The Haryana State Employment of Local Candidates Act, 2020, in effect from May 1, 2021. Further, India has currently deferred the implementation of four new labor codes that amalgamate 29 existing labor laws, namely – Code on Wages, 2019; Industrial Relations Code Bill, 2020; Code on Social Security Bill, 2020; and the Occupational Safety, Health and Working Conditions Code Bill, 2020. Once all states notify the rules of implementation – these four codes will come into effect throughout the country. The new labor codes aim to reduce the compliance burden on businesses and provide for greater hiring flexibility.
7. Foreign labor hiring regulations: This deals with the regulation of hiring expatriates and foreigners in occupations. For example, foreign hires must have skills that are not easily available in the local talent pool or their work experience in management roles or specific expertise is essential to the company’s operation in India. There are also minimum salary and wage stipulations attached depending on occupation and industry.

How our experts at Dezan Shira & Associates can help

As more businesses get ready to diversify their production or relocate parts of their supply chain for future-proofing or saving on costs – commissioning a labor market study based on sound research and data will enable you to choose the best possible solution for the long-term stability and growth of your business.

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Our experts at Dezan Shira & Associates (DSA) have the required capabilities and experience to provide this intelligence for your business relocation planning. A good labor market study will explain concisely and precisely what the important factors are to be considered when relocating a factory. These findings will additionally be demonstrated through a case study approach.

To achieve this, our experts at DSA can conduct a labor market study to assist the business with identifying three to four locations or key economic clusters in the country. Thus, through the labor market intelligence report, the business will understand various costs, taxes, and incentives available at each location, as well as be able to identify average salaries and social benefit costs across target locations to optimize your pricing model. The previous section briefly explained some of the research parameters that get covered in a local labor market intelligence report.

Koushan Das, Manager, Business Intelligence, at DSA’s India Office elaborates on the value of such an undertaking:

The information produced in a labor market study will strengthen the capacity for C-suite and executive decision makers, especially when they analyze the cost-competitiveness of potential relocation sites that have comparable virtues. Once the data and facts are collected and compared, decision makers can appropriately evaluate their options and make an informed decision with confidence. For small and medium-sized enterprises, this decision making has huge implications as the operational cost margins are narrower.

Over 30+ years, Dezan Shira & Associates has helped foreign firms and organizations overcome various market entry and expansion challenges. Through in-depth research and analysis, we provide clients with the ability to better understand their options in new markets and make informed decisions on where to invest. For more information on the types of labor market study your business requires and assessing your relocation options in India and Asia, please feel free to email us at india@dezshira.com.

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