10
-
A
SIA
B
RIEFING
| July and August 2014
The Indian Advantage: Asia’s Next Manufacturing Juggernaut
India’s Edge: Labor Costs
India’s labor costs consistently rank among the lowest worldwide
and are often cited as the country’s principal advantage as a
manufacturing base. According to the Bureau of Labor Statistics,
average labor compensation (including pay, benefits, social
insurance, and taxes) in India’s organizedmanufacturing sector have
only increased marginally in recent years, from US$0.68 per hour in
1999 to aroundUS$1.50 per hour today, and fromUS$0.53 toUS$1.00
among production workers over the same period.
When comparedwith an average compensation of US$3.00 per hour
in China’s manufacturing sector (a 20 percent year-on-year increase
fueled by an annual 13 percent rise in China’sminimumwage), India’s
labor cost advantage places the country inmore direct competition
with emerging manufacturing jurisdictions such as the Philippines
and Vietnam over now-declining China, Thailand, and Malaysia.
In addition to being extremely cost competitive, India’s nearly 500
million strong labor force offers manufacturers access to not only a
substantial population of unskilledworkers, but also a rich talent pool
of English-speaking scientists, researchers, and engineers capable
of lending cost-effective research and development support to
manufacturing operations. After more than 37millionworkers chose
to leave India’s agricultural sector for better-paying manufacturing
jobs between 2005 and 2012, a slowdown inmanufacturing activity
last year (a 0.7 percent contraction) stranded a large segment of the
population in low-wage, rural employment. Partly as a result of this
contraction, the demand for manufacturing-based employment
has never been higher, and pressure has begun mounting for the
Indian government to take concrete steps to foster the creation of
enough manufacturing jobs (roughly 12 million per year) to absorb
the country’s impending demographic dividend.
Future Prospects
Over the next decade, two key policy areas—labor reform and
retrospective taxation—are likely to determine the future appeal
of India’s manufacturing sector to foreign investors. Initially created
to enhance worker welfare, India’s outdated labor laws have often
had the opposite effect by encouragingmanufacturers to stay small
and operate primarily in the unorganized sector to circumvent legal
regulation. India’s terms of work, hiring and firing, and working
conditions are stipulated by the Industrial Dispute Act of 1947,
Factories Act of 1948, and Contract Labor Act of 1970. These are
among several prominent labor laws that continue to drive up
costs for midsized firms and typically lead to the hiring of unskilled
contract workers in informal sector operations.
Fostering a stable and transparent economic climate for foreign
investment—partly through theabandonment of India’s controversial
retrospective taxation policies—has been identified as a key area for
reform by the Modi administration. With several multi-million dollar
tax disputes still in limbo, standardizing India’s fiscal, tax, and policy
regimes alongside the timely resolution of these disputes could
deliver the business confidence needed to expedite the migration
of manufacturing operations to India.
As Narendra Modi settles into office, foreign investors are optimistic
that the BJP’s rare parliamentary majority will provide respite from
the coalition deadlock that has obstructed tangible policy reform for
more than three decades. If the BJP’s promised labor and FDI reforms
come to fruition, the meteoric growth of India’s domestic market,
combined with US$1 trillion in planned infrastructure investment
and an ambitious National Manufacturing Policy (NMP), is set to
reap significant dividends for the manufacturing sector later this
year. Aiming to increase the sector’s share of GDP to 25 percent
by 2020, the NMP outlines a roadmap for streamlining investment
and taxation policies while improving core infrastructure such as
railways, roads, and ports. With growth in India’s manufacturing
sector outpacing China’s in June and reaching its highest rate of
expansion since February 2013, it is more than possible that India’s
rise has already commenced.
0
1
2
3
4
5
6
$0.70
2000
$0.71
2001
$0.73
2002
$0.81
2003
$0.85
2004
$0.91
2005
$0.95
2006
$1.17
2007
$1.26
2008
$1.24
2009
$1.46
2010
Average hourly compensation costs for all employees in
Indianmanufacturing, U.S. dollars, 2000-2010
Note: Data refers to India’s organized manufacturing sector only.
Source: U.S. Bureau of Labor Statistics, International Labor Comparisons
Average hourly compensation costs for India and China,
as a percent of costs in the United States, 2002-2009
2002
India
China
2003
2004
2005
2006
2007
2008
2009
