The sharp drop in India’s economic growth rate to 5.4% in the July-September quarter of 2024 has raised concerns among policymakers and industry leaders. One of the critical factors identified behind the slowing demand is the low-income growth in the corporate sector, despite profits growing fourfold over the past four years. This disparity has sparked discussions within corporate boardrooms, key economic ministries and industry bodies.
A report prepared by the Federation of Indian Chambers of Commerce and Industry (FICCI) and staffing firm Quess Corp Ltd highlighted the compounded annual wage growth rate across six major sectors from 2019 to 2023.
The findings showed wage growth ranged between 0.8% for engineering, manufacturing, process and infrastructure (EMPI) companies and 5.4% for fast-moving consumer goods (FMCG) firms. However, when adjusted for inflation, wage growth was either negligible or negative. Over the same period, retail inflation stood at 4.8%, 6.2%, 5.5%, 6.7% and 5.4%, compounding the issue of stagnant real incomes.
Chief Economic Advisor (CEA) V Anantha Nageswaran has addressed this issue in several public forums, pointing to the FICCI-Quess report.
At the Bharat @100 Summit organised by Assocham, Nageswaran remarked, “There has to be a better balance between the share of income going to capital in terms of profits and the share of income going to workers as wages. Without that, there will not be adequate demand in the economy for corporates’ own products to be purchased. Not paying workers, or not hiring workers enough, will end up being self-destructive for the corporate sector itself.”
Nageswaran noted that corporate profitability reached a 15-year high in March 2024, with profit after tax at 4.8% of GDP. In contrast, the staff costs of listed companies have been declining. He observed, “The growth in compensation to employees has become weaker and weaker. If you take out managerial compensation, the decline looks even more acute.”
The FICCI-Quess report revealed that wage growth varied significantly across sectors. The EMPI sector reported the lowest compounded annual growth rate (CAGR) at 0.8%, while the FMCG sector recorded the highest at 5.4%. The BFSI sector saw wage growth of 2.8%, retail 3.7%, IT 4% and logistics 4.2%. In absolute terms, average monthly wages in 2023 were the lowest in the FMCG sector at Rs 19,023 and the highest in the IT sector at Rs 49,076.
Economic experts and policymakers have expressed concern that the slow wage growth has led to subdued consumption, particularly in urban areas. Government sources have noted that while pent-up demand post-Covid initially boosted consumption, the lack of substantial wage growth has impeded a full economic recovery to pre-pandemic levels. Analysts have pointed to structural issues, including labour surplus and low bargaining power, as underlying reasons for the wage stagnation.
Soumya Kanti Ghosh, Member of the 16th Finance Commission and Group Chief Economic Advisor at the State Bank of India, observed, “Slow wage growth is a recurring phenomenon worldwide, with wages as a share of GDP persistently declining over the last decade. In India, this is compounded by an underemployment problem, which highlights the need for creating high-quality jobs to drive broader consumption.”
Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company, emphasised the importance of raising labour productivity to address the issue. “If productivity is high, even paying more will cost less. The way to make people rich is to increase productivity, which will also support growth,” he said.
Some in the industry believe the issue is more pronounced in the informal sector than the formal one. Naushad Forbes, Co-chairman of Forbes Marshall, argued, “The formal sector has seen consistent salary growth of 5-10% annually for years. The challenge lies in the informal sector, and the focus should be on greater workforce formalisation and promoting employment-generating sectors like textiles and tourism.”
The findings from the FICCI-Quess report and the broader discussions among policymakers underscore the urgency of addressing wage stagnation. As India strives to navigate its economic recovery post-pandemic, achieving a balance between profit growth, equitable wage distribution and productivity enhancement remains critical to fostering sustainable and inclusive growth.
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