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Structural Changes are Generating Employment

Surge in non-urban consumption is benefiting many companies & is driven by structural changes and less by Government handouts

In April 2013 I wrote a column for this publication highlighting the 15-120% annual wage inflation that blue collar workers have been experiencing over the past five years. The fact that wage inflation has sustained right through the sharpest economic downturn in the last 15 years has confounded most economists. I suggested in my April piece that blue collar wages are growing at a rapid clip due to:

  • A sharp jump in educational enrolment (which is reducing labour supply);
  • A reduction in female labour force participation (which is further reducing labour supply);
  • A major increase in labour demand in the large labour exporting states of northern India (eg. UP, MP, Bihar, etc) which is reducing labour supply in the rest of the country.

A rural wedding 300km from Mumbai offered me some clues to resolve this wage conundrum. In this column I explain how dramatic changes in social norms (especially with regards to women’s education and employment) and in transport & communication networks seem to have created sustained “labour scarcity” in rural India which, in turn, is propelling wages at the bottom-of-the-pyramid by 15-20% per annum. Hence I believe that this wage boom (and the attendant surge in non-urban consumption which is benefiting so many listed companies) is driven more by structural changes in India and less by handouts from the Government.

In early February, the lady 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 NH-17 (aka 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 km down a steep incline which would have broken our car.

My discussions with some of the 50-odd people who live in this picturesque 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. Here is a summary of what I learnt:

  • 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 and clinics (as assistants to whoever owns the place), in offices (as peons or clerks) or, occasionally, in factories.
  • The few able bodied men who stay in the village either drive auto-rickshaws in the country lanes (Bajaj Auto and Tata Magic Iris being the favoured rides) or run small local shops or work in the local government in clerical roles.
  • More interestingly, 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 alphabets. Then there is a primary school for every cluster of 3 or 4 villages. Finally, there is a senior secondary school for every dozen-odd villages. The chats that I had with the teenagers at the wedding suggested that girls more than boys are choosing to go to senior secondary school (inspite of the fact that the closest such school is an hour’s auto rickshaw ride away from the village of Farare).

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 NREGA wage in this region is around ₹250 per day and that’s available for 150 days in the year thereby suggesting that a villager who lives off NREGA can earn ₹38,000 per annum. However, even if an employer offered ₹50,000 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 (who also want a gym and a spa to be added to the hotel). 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 penetrates deeper into the countryside, it is spawning a service industry (guards, waiters, clerks, shop assistants) 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. More than government handouts, it is this phenomena which seems to be driving wage inflation.

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 remote village of Farare there are two buses everyday which ply the 8-hour journey to Mumbai. From the Taluka headquarters, Dapoli, there are 12 daily buses to Mumbai. A decade ago not only were the buses fewer, the roads were in even worse shape say the villagers. During our drive down NH-17, we saw a 200km stretch where the highway is being widened from 2-lane to 4-lane.
  • Mobile phones, as is well known, seem to have penetrated the remotest corner 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 narrative have become relatively widespread and this has powerful investment implications.

Investment implications

  • It is not obvious that the Government has played a huge role in the economic and social progress made by Maharashtra (ten year economic growth CAGR of 9.0% vs 10.2% for Gujarat). More important, it would appear, are the underlying changes in social norms and aspirations, in educational enrolment patterns and in transport networks. Provided these changes continue, we should expect to see the rural Indians continue to rise economically. In the village of Farare the 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 modern homeware (such as electric kettles or 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 and provide credit in competition with SBI, they are aiding other “penetrators” like Maruti, M&M tractors, Tata Motors, the telcos, the paints, cement and electrical companies increase their sales. The ongoing boom of this semi-urban economy promises to be the big story of the next decade in India.
  • At present what is notable in villages like Farare and in towns like Dapoli is that hardly anybody works in factories largely because there are so few 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 are bound to see a substitution of labour by capital in Indian villages. On this trip I met small landholders who told me that the farmers who can afford it are switching away from rice cultivation to growing mangoes and cashews. To the extent that this trend is being replicated across India, it 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.

Saurabh Mukherjea is CEO of Institutional Equities at Ambit Capital. The views expressed here are personal.