A sharp drop in economic growth to 5.4 percent in July-September this year has raised concerns among policymakers that despite a 4-fold (four-fold) increase in profits in the past four years, the corporate sector has a low single-digit income growth rate. Reasons behind demand slowdown.
What has fueled the conversation between corporate boardrooms, key economic ministries, and the two is a report prepared for the government by industry chamber FICCI and Quess Corp Ltd, a tech-enabled staffing firm with more than 3,000 clients. Between 2019 and 2023, the annual wage growth rate in the six sectors was between 0.8 percent. engineering, manufacturing, process and infrastructure (EMPI) companies and 5.4 percent for fast moving consumer goods (FMCG) firms.
What has worsened the problem for workers, even in the formal sectors, is low or negative growth in real incomes, i.e. wage increases when adjusted for price increases or inflation. In the five years from 2019-20 to 2023-24, retail inflation has increased by 4.8 per cent, 6.2 per cent, 5.5 per cent, 6.7 per cent and 5.4 per cent respectively.
Chief Economic Adviser V Ananth Nageswaran mentioned the FICCI-Quess report in at least two of his corporate gathering addresses, and suggested that Bharat Inc needs to look in, and possibly do something about it.
Government sources said weak income levels were one of the reasons for low consumption, especially in urban areas. “Post-Covid, consumption picked up with pent-up demand, but sluggish wage growth has raised concerns about a full economic recovery to the pre-Covid phase,” a government source told The Indian Express.
The FICCI-Quess survey results, which are not in the public domain but accessed by the newspaper, show that the compound annual growth rate (CAGR) for wages in 2019-23 is the lowest for the EMPI sector at 0.8 per cent.
It was the highest for the FMCG sector at 5.4 percent. Wages for BFSI (Banking, Financial Services, Insurance) increased by 2.8 percent in 2019-23; for retail at 3.7 percent; 4 percent for IT; and logistics 4.2 percent.
In absolute terms, the average wage was the lowest for the FMCG sector at Rs 19,023 in 2023, and the highest for the IT sector at Rs 49,076 in 2023.
Inflation more burden
What makes the problem worse for workers is the low or negative growth in real incomes, ie wage growth when adjusted for price increases or inflation. Chief Economic Adviser V Ananth Nageswaran has flagged this as “self-destructive” and urged India Inc to look inward.
At Assocham’s India@100 summit on December 5, Nageswaran said there should be a better balance between the share of income going to capital and the share of income going to workers’ wages in terms of profitability. “Without that, there won’t be enough demand in the economy for corporates to buy their own products. In other words, not paying workers or hiring enough workers can actually be self-destructive or harmful to the corporate sector itself,” he said.
In fact, corporate profits were at a 15-year high in March 2024, Nageswaran pointed out.
“The previous high was 5.2 percent of GDP, profit after tax, in March 2008. That was the boom era. But being able to reach 4.8 percent in 2024 in a post-Covid and very difficult global environment… whereas 2008 was a very friendly global growth environment. This means that profit growth has been quite impressive. He said that there has been a four-fold increase in the profits of the Indian corporate sector in the last four years.
Staff costs for Indian listed companies, be it IT firms or general, are coming down, Nageswaran said. “In other words, the growth in employee compensation has been weaker and weaker. And if you take out managerial compensation, the decline looks even sharper,” he said.
In the survey, the average gross salary is calculated by dividing the total salary of all employees in various jobs in a particular sector by the total number of employees. The survey notes that salary increases are indicative and not fixed because salaries vary by job role, with some job roles earning higher wages than others.
Concerns about salary reduction are also raised in the internal discussions of the government.
To put things in perspective, an analyst at India Inc., who is aware of the discussions in the government, said that at this macroeconomic stage of development, India is bound to see rising inequality.
“The pandemic has accentuated the problem; we are 7 percent behind the pre-pandemic growth trajectory. And you can’t ignore the fact that the workforce in India is much stronger. So our economy is a year behind where it should be, and we have more There is one year of labor,’ said an analyst who did not wish to be named.
“The bargaining power of labor is low because there is a surplus of labor over capital. “Slow wage growth is clearly inevitable,” the analyst said. But should corporate India do something about it? “In this macro environment, this is the result of…,” the analyst said.
Some other economists The Indian Express Slow wage growth has also led to slow growth in labor productivity and low-quality employment in India, he said. “Slow wage growth is a recurring phenomenon across the globe, along with wage growth, as the share of GDP in countries across the world, including India, has been steadily declining over the past decade. Thus, the long-held assumption about downward nominal rigidity of nominal wages when organized labor was very strong before the 1990s is no longer valid. Employees can no longer resist wage cuts and are willing to work at lower rates, explaining the much slower growth in labor productivity. This is also part of India’s problem of producing low-quality jobs. India actually has an unemployment problem and we need to generate good quality jobs to ensure consumption on a broader basis,” said Soumya Kanti Ghosh, Group Chief Economic Advisor, State Bank of India, Member of the 16th Finance Commission.
Some experts point out that the solution lies in increasing labor productivity, which in turn will help growth. “No one has the answer. As an investor, I need growth and if there is no return, people will not invest or take risks. I think the solution is not to pay more but to increase productivity. If productivity is high, even if you pay more, it costs less. “Today, productivity of Indians is weak and we are lagging behind our global peers. The way to make people rich is to increase productivity and that also helps growth,” said Nilesh Shah, MD of Kotak Mahindra AMC.
Some in the industry said the problem of slow wage growth was more of a problem for the informal sector than the formal sector. Forbes Marshall co-chairman Naushad Forbes said, “The data presented depends on the period selected. It would present a different picture if it started with the covid period, as wages fell and then rose. So it depends on where you start.”
“In my opinion this is not a problem in the formal sector as for many years companies have been increasing salaries by 5-10 per cent every year. The challenge is in the informal sector and this is where the concern lies. Also, the most important aspect is the number for job creation and job creation. I think the policy focus should be on comprehensive formalization of the labor force and how to grow more employment-creating sectors like textiles, tourism,” he said.