Renowned as low cost destinations, manufacturing industries thronged China and India in the early 2000’s, sprouting factories on the back of low wages and cheap raw materials. However, optimism in the domestic market, inflation and a flood of foreign investments has led to a sharp rise in manufacturing salaries in both India and China.
Total labor costs in India’s formal manufacturing sector have risen 20 percent this year and are expected to average US$2.68 per hour in 2010 compared to China’s US$2.51, a rise of 10 percent. Basic wages have risen fast in India over the last year, but still lag China, India averages US$1.71 per hour, to China’s US$1.82, according to a recently released report by IHS Global.
While Indian manufacturing costs are higher now, following the spate of strikes in factories in South China in June, over low salaries, the study expects total Chinese manufacturing labor costs exceed Indian salaries by 2013 and to be 20 percent higher than in India by 2020. Over the next ten years, wages in China are expected to rise steadily, as compared to India where growth is more erratic. According to the study, China’s rising wages will not only reflect higher productivity, but also a step up in the value chain as a result of extensive investment in industrial infrastructure.
The difference in overall costs between both countries is however in benefits provided to employees. 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 in India.
According to the IHS 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 percent of labor costs. This figure is heavily diluted by rural workers, however, who earn only 8 percent benefits. Urban workers can earn up to 47 percent additional pay in benefits.
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.