By Tensing Rodrigues*
Let me share with you excerpts from a report appearing in the Financial Times. The 2011 report, says that, India has the highest wage inflation of any Asian economy. Aon Hewitt, the global human resources company, estimates that Indian salaries will rise almost 13 per cent this year, from 11.7 per cent last year. By comparison, China is forecast to have nine per cent wage growth, the Philippines 7 per cent. “Double-digit increases will continue for the next several years expected to be in the range of 12 to 15 per cent across industries. Salary increases are highest in the engineering and automotive sectors, with hikes of above 14 per cent forecast this year. IT outsourcing trails at 11.9 per cent as pressures rise to stay cost-competitive with other outsourcing destinations, including the US, China and the Philippines.”
Jeff Immelt, the chairman of US engineering company General Electric, said earlier this year that the cost difference between running a call centre in the US and India had narrowed to as little as 10 per cent.
That’s a pretty old prognosis. What do you feel is the situation today? Many of those predictions have come right; we have already been bitten by the ‘un-competitiveness’ bug in IT and in several other sectors we are closer to the precipice than we were nine years back. Worse still, we have become un-competitive even in the domestic market with imports getting cheaper, ‘Make in India’ may remain as much of a dream as home grown rice in a Goan household.
What is competitiveness? Also called comparative cost advantage, this is a situation which makes it possible for a country X to produce a certain product at a cost which is relatively lower than the cost of producing that product in other countries. This makes it advantageous for other countries to buy that product from country X. So country X can export that product to the other countries and gain from exports. It can use the proceeds from the exports to import what it wants from the rest of the world.
If a country is competitive in many products, then its exports will exceed its imports, it will have a current account surplus, its currency will command a higher value in terms of other currencies and it will be in a superior bargaining position in the global markets. On the other hand, if a country is not competitive in many products, the reverse will happen.
Now, from where does this competitiveness or comparative cost advantage rise? It could occur from natural resources with which the country is endowed, from the technology that the country posesses, from the spirit of enterprise in the country or the cost of labour. It could also arise from large domestic markets which enable it to reap economies of scale. All the factors together, in different proportions, will determine the competitiveness of the country.
The relative weight of each of the factor will determine which products the country is competitive in. But most of the mass consumption manufactured goods require competitiveness arising from comparatively lower cost of labour. This is, for instance, from where China derived its competitiveness. This is what is referred to as the “workforce competitiveness”.
A secular fall in workforce competitiveness is a danger that lurks large on India’s economic horizon. In a June 2012 essay in foreign affairs, titled “The true lessons of the recession – The west can’t borrow and spend its way to recovery” Raghuram Rajan wrote : “For decades before the financial crisis in 2008, advanced economies were losing their ability to grow by making useful things. But they needed to somehow replace the jobs that had been lost to technology and foreign competition and to pay for the pensions and health care of their aging populations. So in an effort to pump up growth, governments spent more than they could afford and promoted easy credit to get households to do the same. The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.”
Given the fact that the overall wages in India are far lower than in the West, Rajan’s diagnosis may be irrelevant to India. But the comparison here is not between the wages in India and in the West; it is between the wages in India and in other emerging economies. We have become “workforce un-competitive”, if you will permit me to use such a term, in relation to the other emerging economies.
* The author is an investment consultant. Readers can send their comments and queries to email@example.com