India wedding provides clues to wage puzzle

India wedding provides clues to wage puzzle

Mar 5, 2014 7:41pm by James Kynge

By Saurabh Mukherjea, CEO, Institutional Equities, Ambit Capital.

Why has wage inflation, especially at the bottom of the labour pyramid, kept surging ahead even as India has suffered its sharpest economic downturn in the last 15 years? This puzzle has flummoxed most Indian economists.

A rural wedding 300km from Mumbai offered me some clues to resolve this conundrum. It appears that sharp improvements in transport and communications have contributed to a situation of “labour scarcity” in rural India which is propelling wages at the bottom of the pyramid higher by 15 to 20 per cent per year.

Thus, in my view, the wage boom – and the attendant surge in non-urban consumer spending – is driven more by structural changes and less by government handouts.

In early February, the lady (see photo) who works as a nanny in our household got married in a remote village called Farare 300km from Mumbai. My wife and I attended the wedding and to do so we first drove down the Bombay-Goa Road for 220km, then took a state highway for another 50km, then a dirt road for the final 30km and finally walked the last stretch down a steep incline.

My discussions with some of the 50-odd people who live in this hillside hamlet on the sea-facing side of the Western Ghats gave me a few insights into what is driving this unprecedented surge in blue collar wages in India.

• Almost all the able bodied men from the village work in either Mumbai or Pune or in the nearest large town 50km away. They work in homes (as cooks, drivers or security guards), or in shops (as assistants) and in offices.
• The few men who stay in the village either drive auto-rickshaws in the country lanes or run small local shops or work in the local government in clerical roles.
• Almost all the girls from the village go to Mumbai to work before they get married (with the cash that they save being used to pay for their marriage). Furthermore, whilst most of them return to the village to raise their families (whilst their husbands stay on in Mumbai), increasingly some of the girls are choosing to postpone childbirth and continue working after marriage.
• Every child goes to school. Most villages have a play-school where children begin to learn the Marathi alphabet. Then there is a primary school for every cluster of three or four villages. Finally, there is a senior secondary school for every dozen-odd villages.

As a result of the labour migration patterns and educational enrolment mentioned above, it is simply not possible to get labour in rural areas such as Farare. The daily minimum wage paid by the government in this region is around Rs 250/day and that’s available for 150 days in the year, suggesting that a villager who lives off welfare can earn Rs38,000 per annum. However, even if an employer offered Rs50,000 per annum, the villagers say that no one would take that because in Mumbai they can earn at least double that.

So, the core of the wage inflation puzzle, it would appear, lies in understanding why are attractive urban employment opportunities available in such abundance for these villagers. I found some clues regarding this issue in the nearest town of Dapoli, 50km away from Farare, where we stayed overnight.

Dapoli, the Taluka headquarters, has a population of 10,000. We stayed in a small hotel with 18 rooms but as the hotel manager showed us, the hotel is being tripled in size to meet surging demand from travelling executives. Towns like Dapoli are the places where travelling sales executives from the large consumer and auto companies spend the night. As the distribution networks of these companies mushrooms, it is spawning a service industry which in turn is creating jobs. These jobs in turn appear to be draining labour away from the villages and creating wage inflation right at the bottom of the wage pyramid.

There are two additional factors which seem to be aiding the sucking away of labour from rural India and thereby pushing wages upwards:

• Road transport has improved dramatically over the past decade. Even from the remotevillage ofFarare there are two buses everyday which ply the eight hour journey to Mumbai. From Dapoli, there are 12 daily buses to Mumbai. A decade ago not only were the buses fewer, the roads were in even worse shape than now, say the villagers.
• Mobile phones seem to have penetrated the remotest corners of India. This has played critical role in freeing young women from the less privileged sections of society from the confines of their village and giving them the freedom to study and work long distances away from home.

To be sure, neither the economic nor the social advances that I saw in this far flung part of rural Maharashtra can be extrapolated to the whole country. However, to the extent that I have heard the Farare-Dapoli narrative elsewhere in India, significant elements of this story have become relatively widespread.

Investment implications

• It is not obvious that the government has played a huge role in the economic and social progress made by Maharashtra. More important, it would appear, are the underlying changes in social norms and aspirations and in transport and mobile networks. Provided these changes continue, we should expect to see the rural Indians continue to rise economically. In the village of Farare, villagers have pooled their savings to buy an MP3 player, an amplifier and three large speakers. Almost every family has a mobile phone and gifting home appliances (electric kettles, fans) is the done thing at weddings. As far-sighted private sector lenders like HDFC Bank and M&M Financial Services go deep into smaller towns, they are aiding other “penetrators” like Maruti, M&M tractors, Tata Motors, the telcos, the paints, cement and electrical companies. The boom of this semi-urban economy is the big story of the next decade in India.
• What is notable in villages in towns like Dapoli is that hardly anybody works in factories. If a new Government can even marginally accelerate India’s industrial development, this semi-urban economy will really take-off with attendant benefits for the firms mentioned in the previous bullet.
• As rural labour becomes expensive, we could see a substitution of labour by capital. I met small landholders who told me that the farmers who can afford it are switching away from rice cultivation to growing mangoes & cashews. This trend will fuel growing demand for better seeds, more powerful pesticides and better fertilisers. Firms like Bayer Cropsciences, Kaveri Seeds and Pesticides India are well placed to benefit from this trend.