Recently, Mohandas Pai, the Chairman of Manipal Global Education Services expressed his disquiet about the rather low starting salaries for engineering college graduates, accusing IT companies such as Infy, Wipro, TCS of conspiring to keep salaries of graduating engineers artificially low.
Mohandas Pai and Manipal Global have much to gain from higher salaries, for the promoters of Manipal Global also control the trusts that run Manipal University. Like several other Tier 2 (or Tier 1 depending on who you talk to) institutions, Manipal University’s engineering school graduates a large number of engineers who aspire for jobs in these IT companies, whose starting salaries are now capped at Rs 3-3.50 lacs per annum.
Mr Pai’s about turn is fascinating. In his previous avatar, as Infosys’ CFO and then its HR head, he made sure that the starting salaries were set as low as possible. Now that he has moved over to the other side, he is singing an altogether different tune.
Fascinating as that is, we will not dwell much on that, for we are deviating from our central topic, which is about the low starting salaries of engineers in India.
An Uber Driver Earns More Than A Newly-Minted Engineer in India
The IT sector, where at least 40-50% of India’s engineers end up, sees starting salaries of Rs 3 – 3.50 lacs, translating to in hand earnings of Rs ~20-23k annually. True, there are engineers from IITs / NITs and other Tier 1 institutes who get Rs 8-10 lacs when they join MNCs in product roles, or join startups. But for the large majority of graduating engineers, the IT sector is where they typically end up in, and these low starting salaries set the cap on their earnings.
A personal driver in Mumbai and possibly a couple of other cities in India can take home about Rs 13-14k a month (post tax), putting him reasonably close to the engineer’s take home in the first two years. The average Uber driver of course earns at least twice that even after the recent incentive cuts, putting him above the average starting salary of an engineer. India might be one of the few, or only countries, where an Uber driver earns more than a starting engineer!
Without a doubt, the engineer can dramatically up his earnings in the future when he gets his foreign stint and / or acquires relevant experience in a segment of the industry and can shop himself around. The driver’s salary is unlikely to spike sharply in the future though.
Why Starting Salaries For Indian Engineers Are So Low
There is certainly truth to the fact that IT firms set the cap on engineer’s starting salaries. Historically IT majors have accounted for 250-300K jobs; add to that another 50-100K jobs from the smaller firms, and you end up with IT / ITES firms accounting for about 50% of the overall 700K engineers who graduate annually. That pretty much then determines salaries for much of the remaining batch as well, including those going into construction, factories etc.
Low starting salaries, rising gradually, and sweetened with foreign stints, was a key pillar of the entire labour arbitrage model that Indian IT companies pioneered. Without low salaries, Infosys or Wipro wouldn’t have those fat margins. To keep those profits fat and the business model chugging – after all Infosys didn’t have any products or IP, just hot cheap bodies – everybody else in the ecosystem adapted.
Engineering colleges were set up, or evolved, keeping in mind this fundamental reality: our graduates will get Rs 3-4 lac rupee jobs when they graduate, even the best ones. This sets a cap on what these students will pay for, and even work towards. Hence don’t over invest, reduce quality to just above what is required, and play by the rules of the market. Students too invested their time during those 4 years, keeping this reality in mind.
The Tier 2 Engineering College – IT Major partnership was a terrific business model from the mid-90s to the late ‘00s. Each fed of the other successfully (I am reminded here of the Wintel partnership) and made their investors reasonably rich.
However over the last decade, this business model slowly began to creak. Over the last year it has started to shake and sputter. There are 3 broad factors at play
- Starting salaries of Rs 2-2.5 lacs weren’t bad in the early 2000s. But over the past decade real wages have shot up, and the present Rs 3-3.5 lacs is low when we look at the salaries for blue-collar trade such as drivers, carpenters, electricians. In fact even manufacturing salaries have moved higher, as they needed to attract better talent, and can afford it.
- IT majors have started to reduce hiring. Last year they barely hired 200,000, a reduction of 15% over the past year. This year will be even lower. This is led by their business model changing from a simple labour arbitrage model to more complex IP creation businesses which demand better but fewer and experienced talent and new ways of working such as profit sharing.
- The supply of engineers has kept going up as the education sector ramped up supply. This means that the average quality in the sector has dropped.
These 3 factors are effectively destroying the present IT-led engineering education model in India. Keep in mind that engineering is by far the biggest education segment in India. I estimate that it is about $5b (~32-35K crs) out of the $9b undergraduate education market in India.
An unraveling of the engineering education micromarket will have ripple effects across other areas of the undergrad education market, as well as on related segments such as Test Prep, Text Books etc.
What impact can we expect going forward? Who are the big losers? Will there be any winners? What should education entrepreneurs or investors do? What can students do?
- On Engineering Colleges – I see the engineering education market shrinking by about 20-30%; from 700K annual graduates to about 500K or even lower. The biggest impact will be on Tier 2/3 engineering colleges in Tier 2/3 cities such as in Ambala or Bareilly. This is due to the fact that students prefer being in a Tier 1 city for internship and quality of life. Academics prefer cities because of quality of life, jobs for spouses, and because the better students prefer cities.
- There will also be related impact on fees, as it will become tougher for colleges to keep taking fees upwards. Naturally it will become more difficult to push through demands for capitation fees. This will lower earnings for promoters, and thereby make them rethink expansion plans, and evaluate getting out of the sector
- On related segments such as test prep, text book sellers – Most of the well-regarded test preps will continue to prosper. They are anyway about getting into IIT which have become even more desirable as the gap between the average IIT grad’s salary and those of Tier 2 colleges’ graduates have widened. Text book market will shrink proportionate to the student intake.
- On students – We are already seeing a flight to relative safety, such as a preference for Tier 2 colleges in cities over those in Tier 2 centres. Students in Tier 2 schools will also will also look for more internship opportunities and project work with corporates. Companies such as Purple Squirrel, CoCubes which intermediate between students and corporates should do well, though given the fragmented nature of the business, they will find it hard to scale.
- As the B.Tech loses steam, what will students take up then? Perhaps a downscaled B.Tech variant that is the BCA or BSc Computers degree. They could also move away from engineering entirely and look at alternatives such as BBA or BCom
- On Corporates – Most corporates will benefit from having cheap labour given that students will be desperate for short-term projects, paid or unpaid internships etc. In the long run, we could also see corporate university partnerships similar to the co-op model in USA / Canada, where students take long breaks in the middle of their degree to work in corporates.
- On Startups – I see significant opportunities in intermediating between students and corporates, though given the fragmented nature of the industry, i dont see easy paths to scale. I also see opportunities in signaling as a way of helping Tier 2 students market themselves to corporates. I have written about that here. For those preferring a more holistic framework for evaluating opportunities, in higher ed, I have written about that here.
Worth A Read
Why is the median salary of a software engineer in India is around Rs 3.6 Lakh whereas in US it is $71k(ie Rs 44Lakh) which is nearly 12.4 times that of India, but the cost of living or equivalent salary of US is considered to be only 4 to 5 times that of Indian salary?