Thoughts on the Indian Economy

Thinking about assorted economic issues in India.

Friday, May 12, 2006

Change Brewing in India & China

Two different stories are emerging from India and China these days.

In India, companies are complaining about the availibility of educated, middle-class workers. My brother-in-law, who runs a software company based in Pune, said that he is finding it difficult to fill spots. Applicants don't show up to interviews as they are quickly lured away by higher pay elsewhere. As the pool of talent shrinks, there has been upward pressure on wages in the service sector. Salaries for software engineers have been rising 20% a year, and as much as 50% a year. It is surprising that in a country 0f 1.1 billion people that produces three million college graduates including 400,00 engineers, there would such a shortfall of workers. One of the main reasons is that the economic boom has created opportunities outside the outsourcing industry for young middle class youth, decreasing the labor supply for BPO companies. Also, many companies say that although there is quantity of workers, there is a lack of quality. According to data, only 8% of applicants' English-speaking skills and training is up to par. 20% can be hired, but require extensive training. On the other side of the labor market, poor infrastructure is impending the growth and expansion of firms.

In neighboring China, the story is the same for the manufacturing sector. Chinese government statistics estimate that over the past three years, minimum wages have risen 25% in the big cities. In various provinces around the country, labor shortfalls ranged from 200,00o to 500,000. As Chinese become richer, they are moving away from unskilled jobs. University enrollment has also increased drastically-- from 4.3 million in 1999 to 14 million last year. Another factor behind the shrinking pool of workers is an aging population. There is no doubt that the forces behind India's and China's economic boom, services and manufacturing respectively, are changing. The question is, what are the countries doing about it?

An article entitled Watch out, India in this week's Economist provided some insight into what China might be doing about it. According to the article, China has been experiencing a demand for business process outsourcing (BPO) primarily due to clients who want the lower labor costs available to them in China. The typical salary for a data-entry clerk in Beijing is around $50/month cheaper than in Chennai. Also, companies are attracted to China as a way of diversifying their risk away from India and also, because of better infrastructure in China. To put things in perspetive, however, China is still far away from becoming a dominant force in this area. Compared to India $23.4 billon outsourcing industry, China's is a mere $2 billion. India's education and training system produces a better labor force, superior in English and with better practical training. The article concludes that,

"For the moment, China is likely to capture an increasing share of flow-level BPO tasks, such as data entry, form processing and software testing, while India continues to dominate higher-value functions, such as research and design, which require greater creativity and language skills. However, this will change as more western firms demand support in China and domestic opportunities grow."

The changing face of the manufacturing sector in China and the country's entry into BPO should catalyze policies in India which 1) speed up movement into manufacturing and 2) transition India'a service sector from the world's back-office to more innovative and cutting-edge products. By developing these two sectors, these policies can create viable jobs (and given the youthful nature of India's forecasted labor force, it certainly needs many, many jobs) for not only the well-educated middle-class urban youth, but also the low-skilled, rural population. The general areas to focus on are infrastructure, labor laws and education. These three issues deserve a much longer discussion than I am providing here (although very rich material for future blog entries). Better infrastructure is essential for developing both, large-scale manufacturing as well as high-tech research centers and laboratories. Loosening rigid labor laws will provide a boost to manufacturing. Increased quality and accessibility to primary & secondary education enables and empowers the lowest strata of the Indian economy. High calibre university education which stresses creativity, entrepreneurship and innovation will output a labor force with a potential to really take India's economy into a 8%+ growth phase.


Blogger Ankur said...

do you see some form of a role reversal here (or maybe over the next 20 years)?

India> moving from services to manufacturing.
China> Moving from manufacturing to services.

Logic: although comparative advantage states that one of agro/services/manuf should cloud over the rest (as a sector contributing to your GDP, Trade), i have a feeling this solution isnt a global optimum, more a local optimum. I have a feeling your global optimality is derived through a proper mix of the 3 (and others!) sectors.

what mix? well thats what we need to know. :)

4:29 AM  
Blogger Jay said...

Hi ishani! I see you've been busy.

My comment (though not macro in nature):

True, infrastructure is the key. However as most rural parts of the united states have found out through trial and error, improving infrastructure does not in itself increase growth in the long term.

India should focus on improvements to its existing centers of trade first.

5:29 PM  

Post a Comment

<< Home