More the worry over Indian
wages By Siddharth Srivastava
NEW DELHI - India has shown the highest average
salary increase in the Asia-Pacific region in 2004,
beating China, South Korea and Japan, according to a survey by
global human resources firm Hewitt Associates. There are
concerns, however, that such hikes in wage costs may
result in the exit of business that come to the country
for just the opposite reason - low overheads.
What is particularly worrying
is that the highest rise in wages has occurred
in the information-technology (IT) sector, where India bids to
be the No 1 player due to a combined advantage of
low-cost and high-quality manpower at its disposal.
Combined with the news that the rupee has appreciated in
the face of a depreciating dollar, IT firms that rely
heavily on export revenue fear a resource crunch.
According to the Hewitt report, India showed
the highest average salary increase in Asia, followed
by China, the Philippines and South Korea. While
India reported an 11.6% overall pay hike, in China salaries
grew by 6.4-8.4%, in the Philippines 7.4-7.7% and
in South Korea 6.4-6.8% for the year 2004. The hike during Phase
I of the survey in India was marginally higher
than the 11.45% logged in 2003, said Hewitt's Asia-Pacific
business head for talent and organization, Nishchae Suri,
adding that Phase II would be completed by February. More than 1,000
companies from the IT, banking, chemicals, construction and
engineering sectors in Australia, China, South Korea, India,
Japan, Malaysia, Hong Kong, Singapore, the Philippines,
Singapore, Taiwan and Thailand took part in the survey.
Employers in the region reported a more positive
outlook in terms of salary increases in 2004 largely due
to a regionwide economic upswing, Hewitt said, adding
that the trend is expected to continue next year as well, with
very few companies reporting the need for a pay freeze
in 2005. "The economic upswing is clearly reflected in
the overall increases experienced by countries in Asia.
Considering the global attention drawn by India, the
Philippines and China, it is not surprising to see the
highest salary increases in these countries,'' said Mick
Bennet, Hewitt's managing director for Asia-Pacific.
But observers are worried that the IT industry
witnessed the highest average salary increase at 14.5%.
The rising wages coupled with an appreciating rupee in
the face of a high US fiscal deficit and the no-tax
promise by President George W Bush to plug it will end
up eroding the basic comparative advantage that India
enjoys vis-a-vis other low-cost centers of the world
such as Vietnam, China and the Philippines, which are
beginning to focus on the software sector.
In an
interview, Vivek Paul, vice chairman and president of
Wipro's global IT arm, has warned of an end to the
low-wage culture that has been at the heart of India's
software boom. Indian software engineers typically earn
one-eighth of the salaries of their counterparts in the
United States and Europe, with average monthly salaries of US$700
as compared with more than $5,000 in the US. Paul says the rupee,
in "purely economic" terms, is 20-30% undervalued in
international currency markets. It has risen only 1%
against the US dollar over the past six months, during
which the greenback has plunged against major currencies
such as the euro. Paul warned that India's cost advantage
could "fritter away as salary costs go up and as the
rupee continues to appreciate".
The fear is that an appreciating rupee
in consonance with rising salaries could result in the
evening out of purchasing power differences between the rupee
and the dollar. Though the exchange rate between the
dollar and rupee stands at more than Rs45 to a dollar, $1 is
actually considered to be equivalent to Rs9 in terms
of purchasing-power parity. That is, the same bundle of goods and
services that can be purchased for $1 in the US can be
obtained in India for Rs9. Software companies generally
base pay packages on purchasing-power exchange rates for engineers
who seek work in India after a stint in the US. In
the process, software companies' book profit as the
exchange rate between dollar and rupee are much higher
than the difference warranted by cost of
living. With appreciation of the rupee, however, the
exchange-rate advantage is narrowed while rising salaries negate
the purchasing-power parity, which makes it a lose-lose
situation for Indian exporters.
India's software exports have surged by 30% this year.
Revenue from India's IT exports was $12.5 billion in
2003-04 (March ended), which in turn has resulted in a
10-15% annual rise in wages in India's software and
back-office-services industry. According to research firm Gartner
Group, the global IT services market is worth $580
billion, of which only $19 billion is outsourced. India
has 80% of this offshore market. The figure for
outsourced IT services is expected to grow rapidly.
Industry observers say there may be no immediate
threat as Indian firms have incorporated elaborate plans
to circumvent rising wages. Most Indian IT firms that
operate globally have begun implementing backward
linkages to cheaper locations. IT giants such as Wipro,
Infosys, Satyam and TCS have set up operations in China,
given the lower wage cost of software engineers there
because of the excess supply of trained manpower.
The Hewitt survey also warns against high
attrition rates in Asia. The highest turnover was
reported in India, where the average rate was 15.4%, a
reflection of the rampant job-hopping in the Indian
corporate world, especially the IT sector. Other markets
with high attrition rates include Australia with 15.1%,
China (12.6%) and Hong Kong (12.1%). The respondents also
projected greater salary increases for 2005, the survey
said, adding that there was a stark reduction in the
number of companies projecting pay freezes next year.
None of the companies in India, China, Australia,
Malaysia and Singapore anticipated a pay freeze, it
said.
Siddharth Srivastava is a New
Delhi-based journalist.
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