Manufacturing labour costs in India have risen nearly 20% this year and will eclipse those in China as Indian workers have seen their wages increase sharply over the last year on the back of high inflation and a recovery in domestic demand, according to a study by consultants IHS Global Insight.
The results of the firm’s latest “Global Manufacturing Compensation Watch” study show that China’s manufacturing labour costs are expected to rise 10% this year despite a slowdown in exports to the West as a result of the recession.
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“Labour costs are still rising fast in both markets. Rapid growth, productivity gains, and an explosion in outsourcing have put increasing pressure on wages in developing economies like India and China,” said Katherine Lewis, a director at IHS Global Insight and one of the authors of the study.
For multinational companies, understanding the labour costs associated with manufacturing facilities around the globe is a key issue when making investment decisions. India and China have long attracted foreign investment given relatively low risk profiles and their high levels of surplus labour.
Total labour costs in India’s formal manufacturing sector are expected to average USD2.68 per hour in 2010 compared to China’s USD2.51. Basic wages have risen fast in India over the last year, but still lag China – India averages USD1.71 per hour, to China’s USD1.82.
The study suggests that the difference in overall costs between both countries is in benefits. India’s benefit structure includes contributions to the Provident fund (social security), survivor insurance, pension contributions, state-mandated 13th month pay, and double pay for overtime.
“As basic wages rise, then benefits increase accordingly which can add considerably to companies’ costs, especially in India,” Lewis said.
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By GlobalDataAccording to the study, benefits make up roughly 36% percent of labour costs in India. The figures would be even higher if employers did not avoid many of these costs by employing contract workers.
In China, benefits make up just over 27% of labour costs. This figure is heavily diluted by rural workers, however, who earn only 8% benefits. Urban workers can earn up to 47% additional pay in benefits. All the figures for India and China are based on national averages.
China’s manufacturing sector is more heavily dependent on exports to the West, which have suffered in the wake of the global recession. India’s economy, on the other hand, benefits from more diversity and domestic demand, allowing the rising wages to push total costs ahead of China.
Auto costs rising fast
Key manufacturing sectors, such as auto production, have already felt the pinch of rising labour costs. Auto manufacturing workers typically make more than the average manufacturing worker, and rising costs will continue to pressure manufacturers. IHS Global Insight estimates labour cost for auto workers in China is USD4.02/hour, roughly 60% more than the national manufacturing worker average. On the other hand, auto workers in India are compensated at roughly USD3.30/hour, just over 20% more than the national manufacturing average.
Chinese wages, which have been in the spotlight recently due to a series of high-profile factory strikes, are set to continue rising strongly in coming years – putting total Chinese labour costs above India by 2013 despite lower benefit payments required from employers, Lewis said
By 2020, total manufacturing labour costs in China are expected to be 20% higher than in India as wages in China are expected to rise steadily whereas in India growth may be erratic.
“China’s rising wage costs reflect higher productivity as a result of extensive investment in industrial infrastructure,” Lewis noted.
