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What about productivity? PDF Print E-mail
Wednesday, 20 April 2016 01:15
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Just hiking wages in isolation is asking for trouble

 

Hiking the minimum wage, as the government is planning, will go down well with the trade unions and the general public—once the minimum wage is hiked, expect an increase across the board—and many will argue that even the Rs 10,000 per month that is planned is not enough given the cost of living and the runaway inflation in items like pulses. While that may well be true, it misses the point—in order to survive, you need to be competitive. If you’re not, you can have higher mandated wages, but there will be no jobs. Raise the wages too much and instead of Indians buying locally produced textiles, to use an example, they will buy smuggled Chinese or Bangladeshi or Vietnamese clothing.

Consulting firm BCG has some interesting numbers in this context. In the apparel sector, it finds India’s average wages are around $112 per month versus just $68 in Bangladesh—this does not include overtime which is an altogether different kettle of fish considering Indian law allows just half the number of hours that Bangladesh does. Since both Bangladesh and Indian workers have the same level of productivity—it takes each worker 60 minutes to stitch a woven cotton trouser—Bangladesh’s exports are growing faster than India’s. In 2010, Bangladesh exported $3.9bn of apparel to the US versus India’s $3.3bn—by 2015, Bangladesh had risen to $5.4bn while India was just $3.7bn. Bangladesh’s exports do well because they get export benefits in markets like the EU, but we’ve used the US since that offers no such discrimination between suppliers. Or take Vietnam, another fast growing exporter of apparel. India’s wages are lower by a third and offset the extra productivity of the Vietnamese worker who makes the same trousers in 46 minutes—but once you add in the overtime wages and the additional costs of doing business in India including that of the poor infrastructure, Vietnam scores. If you now go and increase the minimum wages, Indian exports get less competitive. While the data cited pertains to exports, the same argument applies to domestic production as well since, in a globalised world where import duties are falling each year—the presence of smuggling lowers this further—you need to be globally competitive in order to survive locally. That’s something India’s politicians and unions need to keep in mind.

 

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