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Home > India > Business > Special

Indian wage inflation to grow

Raphael Minder in Hong Kong | June 12, 2008

Indian companies are likely to keep raising salaries by about 15 per cent a year until 2011 as skills shortages overshadow concerns about higher input costs, according to Mercer, the consultancy.

The forecast, part of Mercer's annual Asia-Pacific compensation report, comes as India struggles with higher energy import costs. Economists expect India 's central bank to act soon to tighten monetary policy, such as raising interest rates, after the annual inflation rate breached 8 per cent in May.

India is one of only three countries in the region likely to maintain double-digit salary increases until 2011, according to Mercer, alongside Indonesia and Vietnam. The report covers salaries across all sectors in all categories of employees in 14 countries in the Asia-Pacific region. It is based on responses from about 500 companies, mainly multinational corporations operating in Asia.

Gangapriya Chakraverti, a senior India consultant for Mercer, said the situation was worrying because "the entire exercise of managing (salary) expectations has been missing.

"Given that companies are already struggling with higher input costs," she added, "there is increasing concern that these two-digit increases are definitely not to the benefit of any business. It will have to peter out at some point, and the earlier the better."

The rise in salaries is also more of a concern for India than a country such as China because services play a larger role in its economy, most notably in the outsourcing sector that has spearheaded India 's recent growth. Chinese annual salary increases are likely to remain above 9 per cent until 2011, according to Mercer, peaking next year at 9.7 per cent.

Employee costs typically represent between 6 and 8 per cent of total costs in the manufacturing sector, and up to 60 per cent of costs in the services sector.

The struggle by Indian employers' to keep a lid on salaries also contrasts with some more mature employment markets that are also facing severe labour shortages, including Australia where unemployment is at a three-decade low.

Australian salaries are expected to rise further, but at a stable rate of 4.3 per cent this year going down to 4.1 per cent in 2011, according to Mercer.

In terms of sectors, Mercer said that 2008 would mark "a change in trend direction" for high-tech salaries, with lower increases expected in most Asian countries amid a decline in US demand for consumer electronics.

In a recent report, economists at Lehman Brothers said that one reason to remain optimistic about Asian inflation was that there were "no strong signs yet of surging wages".

However, Lehman warned that low unemployment presented "a rising risk of wage-price spirals that could fan inflation expectations".

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