Falling wages have begun to impact headline GDP growth

New Delhi: Real wages of the majority of salaried Indian workers have either declined or remained stagnant in the past six years, which has led to a squeeze in demand and as a result impacted economic growth, despite an exponential surge in profits of large companies.

As per the annual Periodic Labour Force Survey (PLFS) data released by the Ministry of Statistics and Programme Implementation, average monthly earnings or wages of workers in rural India declined to Rs 8,842 in 2023-24, which is lower than Rs 9,107 recorded in 2017-18.

Average real wages, after adjusting inflation, for male as well as female workers in rural India during the financial year ended March 2024 was lower than what they were earning six years ago.

The average real monthly wage of male workers in rural areas declined from Rs 9,748 in 2017-18 to Rs 9,589 in 2023-24, while for female workers it fell from Rs 6,439 in 2017-18 to Rs 6,335 in 2023-24.

For the urban workers there was a minor increase. The real wages of urban workers increased only marginally from Rs 12,847 in 2017-18 to Rs 13,006 in 2023-24.

In the last six years, average wages of urban male inched up from Rs 13,426 in 2017-18 to Rs 13,834 in 2023-24, while for female workers it dropped from Rs 10,867 in 2017-18 to Rs 10,693 in 2023-24.

Wages have either declined or remained stagnant despite a huge surge in profits of companies.

Addressing a virtual briefing on GDP data, Chief Economic Advisor V Anantha Nageswaran said low growth in wages have impacted purchasing power of the people and thus the manufacturing sector.

“The real wage for urban male workers has done very well and that is reflected in the overall positive real wage growth. But nothing of this compares to the kind of profitability growth that we have seen,” Nageswaran said.

The corporate profit to GDP ratio increased to 15-year high in 2023-24, as per an analysis by brokerage firm Motilal Oswal. Profit-GDP ratio of Nifty 500 companies swelled to 4.8% in 2023-24 from 4% in the previous year. The number stood at 2.1 per cent during the Covid year 2020-21.

“From 2.1 per cent of GDP to 4.8 per cent of GDP is an impressive growth of the last just three years post Covid, but in comparison both hiring and compensation growth rate have been somewhat on the lower side or tepid,” Nageswaran said.

“And that is also somewhat endogenous in creating less purchasing power in the hands of people, less demand for FMCG goods and light consumer durable goods. That is why you see the impact of that on manufacturing to some extent,” he added.

As per data released by the National Statistics Office (NSO) on Friday, India’s GDP growth slumped to 5.4 per cent in July-September period, the slowest pace in seven quarters, largely due to sluggish manufacturing activity. Manufacturing sector growth during the period was at a six-quarter low of 2.2 per cent.

Growth in private final consumption expenditure declined to 6% in Q2FY25 from 7.4 per cent recorded in the previous quarter. This was largely due to slump in urban demand.

On the demand side, broad-based weakness was visible, with only government consumption increasing in Q2 on a year-on-year basis. Domestic demand's contribution to growth fell to 5.6 percentage point in July-September from 6.7 percentage point in April-June.

“High frequency indicators suggest weaker urban demand is likely to have led to the slowdown,” rating agency CRISIL said in a note.

The urban economy faced a double whammy of high inflation and slowing credit growth. The latest Reserve Bank of India’s (RBI) survey released in October indicated consumer confidence in urban areas moderated on average in Q2, with price levels being one reason.

PLFS (Periodic Labour Force Survey) data shows urban wage growth was becoming sluggish over FY24, particularly for non-salaried workers. Bank retail credit growth, which has a higher footprint in the urban economy, moderated in Q2 following a rise in lending rates.