India wage inflation: mo’ money please

When workers at one of India’s largest public sector companies demand a minimum pay hike of a 100 per cent, you know Asia’s third largest economy has a wage inflation problem on its hands.

Analysts predict that the 100 per cent-plus increase demanded by unions at Coal India could eventually lead to a more modest settlement of around 15-20 per cent, the Economic Times reports. But the episode underscores one of the major problems Indian employers are facing at the moment – how to hire and retain the best staff without taking a hit to their margins.

Workers at Coal India are not the first to have demanded higher wages. Strikes at automakers have been common while talent poaching and high attrition are recognised human resources problems in the country.

According to the most recent government survey data, salaries have soared between 2007 and 2010. For city dwellers, average real wage growth, adjusted for inflation, was 20.8 per cent a year for casual workers and 8.1 per cent for salaried employees.

Rural dwellers haven’t done too poorly either. During the same three-year period, average real wage growth came in at 13.7 per cent a year for casual workers and 8.8 per cent a year for salaried workers, according to CRISIL, the Indian subsidiary of the S&P credit rating agency.

“Wages have risen faster than inflation for both casual and salaried employees,” said D Joshi, chief economist at CRISIL.

According to Joshi – two factors are contributing to this wage pressure. First, there is a skills shortage in the country and second, there has been a slowdown in the rural-urban migration of labourers as many take advantage of government’s social safety net schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA).

“In the infrastructure sector, vocationally trained welders and fitters are missing while a hospital entrepreneur can’t find paramedics. In the finance sector too, there is a talent shortage constraining the job market and leading to a sharp increase in wages,” said Joshi.

Analysts have warned since the start of the year that rising wage bills, combined with successive interest rate hikes from the Indian central bank would put pressure on profit margins in all sectors.

“Companies may tend to hold back from passing on all the wage increases for a while and may choose to absorb the impact leading to some erosion in profit margins in the near to medium term,” Ranu Vohra of Avendus capital, a Mumbai based financial services firm, told beyondbrics back in February.

The view was echoed by a Chennai-based transporter, who told beyondbrics:

“Compared to even four years ago, wage negotiations have become much more difficult. Margin pressures are there because input costs have also gone up…We are trying to delay wage hikes but this will bring labour relations under strain.”