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Rising Chinese wages: impact on India

Rising Chinese wages: impact on India

Rising wages in China have been seized upon as the next big game-changer for the global economy. Speculation about its effects range from a reversal of the low-inflation global environment to a correction of global trade imbalances by increasing Chinese consumption to benefits for low-cost economies such as India as production shifts to them.

Of course, it’ll be a long time before we feel these impacts. The price of Chinese imports to the US, for instance, rose by all of 0.2% year-on-year in July. That’s hardly an endorsement of the “rising global inflation" hypothesis. Or consider China’s trade surplus in August, which was the second highest this year. Again, it’s not exactly supportive of any reduction in global trade imbalances. Nevertheless, companies are repositioning for a slice of China’s consumer pie. BHP Billiton Ltd, for example, justified its bid for Potash Corp. by pointing to the huge Chinese market for fertilizer, demand for which will rise as the Chinese spend more on food. Asian companies can also take advantage of a larger Chinese consumer market.

Also See How They Stand (Graphic)

But surely higher wages in China will lead to companies relocating to lower-cost countries? There are two caveats to that theory. One, factories may be shifted to China’s inland provinces, where costs are lower. And two, since labour is not the only cost, much also depends on other indicators of competitiveness. Just look at the recent global competitiveness report by the World Economic Forum, where China beats India on almost all parameters.

Besides, India’s comparative advantage doesn’t seem to lie in labour-intensive goods. As several studies have shown, India’s export basket is far more sophisticated than is usual for a country with its level of per capital income.

That is also shown by a recent research note by Citigroup Inc. economist Wei Zheng Kit. The note ranks countries in Asia on sectors using revealed comparative advantage (RCA), which “uses trade patterns to identify sectors/products which an economy has a comparative advantage in, by comparing that country’s share of exports for that sector/product, vs its share of total world exports". In terms of RCA, India ranks first in the medium-tech metals industry and does better than China in chemicals (including plastics), non-road transport equipment and pharmaceutical products and equipment. In low-tech industries, however, India ranks below China both in consumer goods (toys, furniture, office supplies, etc.) and in textiles, garments and footwear.

The study says that low-cost industries in other regional economies will benefit from higher wages in China. It also says that, for the long-term, because of economies of scale, “larger economies like India could well be the biggest beneficiaries of production relocation over a broad range of both capital and labour intensive industries, once cost differentials vis-à-vis China become wide enough".

But the immediate effect may well be negative. Says the Citigroup economist: “India’s net loser status might also come as a surprise, given its lower manufacturing wages and per capita GDP (gross domestic product) compared to China. Our analysis suggests that India’s high tech and physical and/or human capital intensive manufacturing industries—such as production of Iron & Steel, Organic Chemicals, Dyes and other Chemical Materials, Aircraft and Ship Building and Pharmaceuticals could be at risk of being displaced by an ‘upgraded’ China. However, like its fellow low-cost neighbours Bangladesh and Sri Lanka, India would likely benefit in low-tech sectors."

One final word of caution—India too has seen severe shortages of skilled labour whenever its rate of GDP growth exceeds 8%. That would mean higher wages for Indian producers too.

Graphic by Yogesh Kumar/Mint

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