Companies making profits, not passing benefits to employees

Profits of private companies have quadrupled over the past four years, yet real wages have stagnated, as reported. This trend persists even as India's GDP growth rate fell to 5.4% in the September quarter.

Private consumption remains the primary engine of India's economy, contributing 60% to the GDP. The key factor driving consumption is the disposable income of individuals. Without an increase in real wages that outpace inflation, GDP growth is adversely affected.

India's economic expansion has decelerated to a seven-quarter low of 5.4% for the July-September period, down from 6.7% in the previous quarter. 

A report from The Indian Express on Thursday underscored the decline in wages despite private companies' rising profits. According to a study conducted for the government by the Federation of Indian Chambers of Commerce and Industry (FICCI) and Quess Corp, the compounded annual growth rate (CAGR) of wages from 2019 to 2023 ranged from 0.8% to 5.4%.

The highest wage growth among the six sectors analysed was recorded in the fast-moving consumer goods (FMCG) sector, which saw a 5.4% increase. This occurs against a backdrop of inflation in India, which has averaged 5.7% annually over the past five years. The data indicates that wages in the private sector have experienced negative growth. This decline in wages is diminishing consumer purchasing power, which in turn is impacting India's economic growth, despite a surge in profits of companies.

Profits of companies, wages to workers quantifiably compared

Earlier this month, Chief Economic Advisor V Anantha Nageswaran noted that profits for private sector firms have reached a 15-year high. "Nageswaran highlighted that profitability (profit after tax) of Nifty 500 companies as a percentage of GDP was at a 15-year-high in FY24 at 4.8%," as reported by The Business Standard. He also pointed out that, despite these record profits, the labour costs for privately held companies are decreasing.

Nageswaran expressed optimism for a GDP growth rate of 6.5-7% in the current fiscal year, noting that certain sectors experienced growth in the December quarter.

However, the economy is being adversely affected by wages that are not keeping pace with inflation. According to sources cited by The Indian Express, "low-income levels were a contributing factor to the lack of consumption, particularly in urban regions."

The report from FICCI-Quess Corp highlighted that wage growth from 2019 to 2023 was the lowest in the EMPI sector at 0.8%, while the FMCG sector saw the highest growth at 5.4%. For the remaining sectors, wage growth was reported as follows: 2.8% for BFSI (banking, financial services, insurance), 3.7% for retail, 4% for the IT sector, and 4.2% for logistics.

This context should be considered alongside the average inflation rate of 5.7% over the past five years. The current situation, characterized by record-high corporate profits juxtaposed with stagnant wage growth, is detrimental to both individuals and the broader economy.

This concern was echoed by CEA Nageswaran, who stated, "The most important ingredient of long-term growth and consumption is to ensure employment income growth and, thus, spending power growth. Otherwise, it will become a mutually self-destructive cycle," as reported by The Economic Times.

It appears to be an opportune moment for the government to encourage corporations to increase their financial contributions.