Profits boom but pay is far from fair

The Chief Economic Advisor to the Government of India, Anantha Nageswaran, while speaking to corporate leaders at an industry chamber event, cautioned that employee compensation growth was poor while India Inc was enjoying a record profit growth. After Covid, the share of post-tax profit of companies listed on the stock exchange has risen to 5.2% of GDP, which is a figure only seen during the boom times of 2007-08. This is the highest ratio in the last 15 years. For Nifty 500 companies (i.e. a smaller subset), this ratio is 4.8%. It has risen quite steeply in the past three years alone. At the same time, the employee compensation share has been coming down. Employment growth in the corporate or formal sector has been poor, and within the employed category, wage or salary growth is nothing compared to the growth in profits. As per a report from Motilal Oswal Financial Services, the growth in profit of Nifty-500 companies over the 2020-2024 period was 34.5% per year, whereas the GDP was growing only at 10.1%.

Profits have been GDP growth by more than 3.5 times during these past four years. By comparison, the growth in salaries was not even commensurate with the inflation rate. Economists Amit Basole and Zico Dasgupta report that from the third quarter of 2021-22 to the second quarter of 2023-24, the average real GDP growth rate was 6.7% whereas regular wages stagnated (minus 0.07% growth). Their findings are based on the Periodic Labour Force Survey (PLFS) data published by the government every three months. This PLFS data will soon be available on a monthly basis. The divergence in growth rate of GDP and wages was evident even before the pandemic. For instance, in the 11 quarters from 2017-18 till just before Covid, GDP was growing at 4.8%, but the regular wages growth rate was a mere 0.21%. Basole and Dasgupta point out that from 2017 till 2024 regular wages, together with earnings of self-employed persons, growth is just 1%. A recent report from Citibank says that for the first three quarters of 2024, the growth in inflation-adjusted wage cost for listed Indian companies has remained below 2%, as against a ten-year average of 4.4%.

Thus, the CEA’s caution to leaders of corporate India is based on a longer-term phenomenon of declining share of wage and salary income as compared to profit share. He was exhorting industry leaders to do their share to ensure the growth boom was shared more equitably. The CEA’s cautionary comments can be read alongside the surprising GDP growth data for the second quarter of this year, i.e. July till September. At 5.4%, it was much lower than expectations. Some of the slowdown is being attributed to slower capital spending growth by the government due to elections. But surely, the bigger contributor is the slowing down of consumer spending, especially in urban areas. Prominent fast moving consumer goods (FMCG) companies like Nestle, Hindustan Lever, and others reported stagnant or falling sales during the July-September quarter. Of course, urban consumers might be shifting to other less expensive brands or reducing quantities purchased. But the FMCG company fortunes are a bellwether indicator of urban spending. It is clear that the urban consumer is facing adverse macro factors, with inflation eating into purchasing power, and wage stagnation keeping income growth limited.

Call for inclusive growth

The implication of all this is that aggregate GDP growth, expected to revive to above 6.5% by next year, and continuing robust growth of company profits must somehow become more inclusive. In the classical textbook analysis, if the share of labour and capital keeps pace with national income growth, that is good. But a declining share of labour income has adverse consequences for consumer spending, and income inequality. One could argue that the same workers could also own company shares via mutual funds and their savings. But then, dividend income is still a minuscule part of household income for most workers – wage and salary income is their main source.

There can be no diktat that India Inc should increase the compensation share to its workers. Besides, it is related to the larger issue of the changing pattern of employment itself. There has been an increase in contract workers and gig workers (who cannot be even considered employees). The strong emergence of AI means many companies and businesses are probably downsizing and resorting to more automation. At the same time, India Inc often complains about the acute shortage of skilled and semi-skilled workers.

Large farmers are unable to recruit farm labour who are typically migrant workers from poorer states. That is because of welfare schemes like free food grain and the rural employment guarantee scheme, which has a distortionary effect on labour supply. The share of the workforce engaged in agriculture has actually increased during the pandemic phase, thanks to reverse migration and industrial downsizing. The share of workers in industry has stagnated for far too long. And so have wages. As per a report of WorkIndia, more than 57% of blue-collar jobs in India pay less than Rs 20,000 a month. That is probably justified because of low average productivity. We are thus caught in a cycle of low productivity, low skills, low pay and low employment, which causes industrial and services growth to be more capital-intensive, which in turn increases the skill shortage, and the weird coexistence of high unemployment and scarcity of skilled manpower.

At some point, the issue of fair compensation is not only important for sustaining purchasing power and consumer spending growth, but also one of equity and justice. The medium-term solution is extensive government support for skilling via on-the-job training and providing incentives to employers, large-scale internships, student loans and relaxing the onerous burden of labour laws which have thwarted growth in employment. The CEA is to be applauded for bringing the issue of fair compensation to the forefront.

(The writer is a noted Pune-based economist; Syndicate: The Billion Press)