World Bank study shows Dragon’s labour costs rising faster than India’s.
NEW DELHI: Is the factory to the world in danger of losing its competitive edge? That seems a distinct possibility if figures in the World Bank’s World Development Indicators (WDI), 2006, are anything to go by.
Labour cost per worker in manufacturing in China increased 54.4 per cent between 1980-84 and 1995-99 while value added per worker fell 5.7 per cent. India, on the other hand, improved productivity by 47.9 per cent over the same period. Though labour cost increased here as well, the rise was muted, at 15.1 per cent. China’s labour cost, though, is still 60 per cent that of India.
Depending on which change is faster, China could lose out, says Basant Pradhan, senior economist at the National Council of Applied Economic Research. Significantly, India also scores in the availability of skilled labour. The report uses figures from World Bank-sponsored firm-level Investment Climate Surveys to show that 30.7 per cent of respondents felt skills were a major constraint relating to labour in China, while only 12.5 per cent felt the same about India.
China watchers like Pradhan are a bit foxed by the fall in productivity. “This is surprising,” he admits. The only explanation he has is that competition may be forcing China to reduce product prices.
There’s no denying, on the other hand, that India has been improving efficiencies. “After the initial jitters over globalisation,” says N Srinivasan, director-general of the Confederation of Indian Industry, “companies started working on managing efficiencies on the shop floor.” In fact, that’s the reason most economists give to explain why, despite rising costs, profit margins of Indian companies have not been squeezed much.
The report does not give data on hours worked or minimum wages in China. In India, the figure for average hours worked per week (46) relates only to 1980-84 while the minimum wage ($408 per annum) relates to 1995-99.
The figures in the WDI report relate to the ratio of total value added in manufacturing to the number of employees engaged in that sector. Total value added is estimated as the difference between the value of industrial output and the value of materials and supplies for production (including fuel and purchased electricity) and cost of industrial services received.
The labour cost figure is the ratio of total compensation to the number of workers in the manufacturing sector. Compensation includes direct wages, salaries, other remuneration paid directly by employers, and all contributions by employers to social security programmes on behalf of their employees. The report cautions that the data may not be strictly comparable across countries.
But labour costs in China are rising, notes Pradhan, as more and more companies use it as a manufacturing base. That’s probably because supply is unable to meet the demand as China has restrictions on people moving from the rural areas to urban areas.
At the same time, unemployment is becoming a serious problem. Skill mismatch is one reason, says Pradhan. He also blames the excessive dependence on manufacturing. “Even if China were to supply manufactured goods to the whole world, it won’t be able to absorb the entire labour force,” he says.
So, if India plays its cards right, it could just steal a march on China.
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