When cheapest will no longer do

by March 6, 2011

In the race for foreign investment, among India’s best-known advantages has been its ability to offer low-cost, English-speaking labour to multinationals looking for a place to build call centres and “follow the sun” programming shops. Indian manufacturing and services companies have similarly relied on the cost advantages that such a work force enables, and the country has enjoyed the resulting high and sustained economic growth rates for some time now.

But this advantage is weakening, argues journalist Arati Menon Carroll in a recent Economic Times article, as newer emerging economies offer still lower costs, along with improving English-language capabilities. India, writes Carroll, must seek to compete with countries like China instead, boosting productivity rather than restraining wages — a change that will require new levels of focus by businesses and employees on work discipline, improved processes, and training, and increased government emphasis on education:

According to a recent BCG report titled Indian Manufacturing: The Next Growth Orbit, while India’s real manufacturing labour productivity has increased by 65% from 1998 to 2006, this growth seems small as compared to China where it has increased by 180% in the same period.

As a result, even though labour wage rates in India are significantly lower than in China, productivity adjusted wage rates equate the two countries. India, according to the report, needs to make substantial efforts to close this productivity gap to remain competitive on a global level.

Pramod Bhasin, president & CEO Genpact, believes it is the false sense of security provided by cheap labour that has led Indian productivity to where it is today. “Because salaries have been cheap, we have never really cared about how much inefficiency costs us. In the West, because labour is costly, they will not hire until they are compelled to do so,” he says.

That will have to change. As labour and raw materials costs rise, productivity has emerged as one of the crucial ways to retain profit margins and make the country’s products cost competitive in the international market. “Cost arbitrage has a discernibly short shelf life, especially in the outsourcing economy. Once other developing countries gain on fluency in English what becomes the source of our competitiveness?” says Rajiv Srivastava, COO, Hewlett-Packard India.

Read the rest of Carroll’s article here.