That there are people working away in India and earning that $1.90 a day which is the signifier of absolute poverty would seem to indicate that India has some pretty cheap labour. That a reasonable sort of wage might be in the $100 to $200 range a month would also indicate that human labour is not all that costly. Yet Sandeep Jajodia has pointed out that India really doesn't have cheap labour. And that's also true, for the important determinant of expense is "compared to what?" And with labour the comparison is to productivity. The productivity of Indian labour is low. Meaning that, as Jajodia points out, we can consider $200 a month labour to be rather expensive:
It is a 'myth' that India's labour is cheap and there is a need for lowering interest rates and logistics cost to make the domestic industry competitive, Assocham President Sandeep Jajodia has said.
He said poor infrastructure, "extremely high" cost of power in addition to high interest rates are eroding the competitiveness of Indian industry.
I'm unconvinced about the interest rate point. Getting the RBI to just lower them would not be a good idea as the current levels are important in order to constrain inflation. However, if we mean lower the rates through making the financial industry more competitive then most certainly, yes. For example, one effect of demonetisation was that by driving up the amount of cash flowing through the banks it drove down interest rates.
An interesting side effect here of India's demonetization plan. As we know, the Rs 500 and Rs 1,000 notes have been cancelled as legal tender, to be replaced by other notes and designs. There are limits on how much cash can be changed for cash (Rs 4,000, soon to fall to 2,000) but no limits upon what can be deposited in bank accounts. Of course, large deposits are going to be subject to tax scrutiny, rather the point of the exercise in fact. But what is interesting is that the flood of cash being deposited is such that it's actually bringing interest rates down.
On the logistics, most certainly yes. Greater efficiency on such matters is always to be welcomed.
“We talk about cheap labour. I don’t think that is true. I don’t think we have cheap labour because the productivity of our labour is so low that where you require one person to do a job abroad, you probably have many people to do the same job.
As Paul Krugman has pointed out labour is cheap or expensive relative to the productivity of that labour:
Second, the link between productivity and wages is thoroughly misunderstood. Non-economists typically think that wages should reflect productivity at the level of the individual company. So if Xerox manages to increase its productivity 20 percent, it should raise the wages it pays by the same amount; if overall manufacturing productivity has risen 30 percent, the real wages of manufacturing workers should have risen 30 percent, even if service productivity has been stagnant; if this doesn't happen, it is a sign that something has gone wrong.
This works both ways around of course:
"I don't think India has any advantage. In fact, it has a lot of disadvantages in terms of the ease of doing business, in terms of interest rates, infrastructure is a very big problem. Our infrastructure cost, our logistics cost is many times of what my competitor faces," Jajodia told PTI in an interview.
Fix all of those problems and doing business in India will be easier, entirely true. But it will also mean that the productivity of labour goes up and so thus will wages. And as I say, we can work the same point the other way around. Wages are low in India because labour productivity in India is low. We can even say that wages are in fact the same everywhere--relative to productivity that is. Low wages mean productivity is low, high means it's high, and relative to output it costs the same amount everywhere.
