After being hit by decelerating sales growth, Indian companies are tightening spending on their wage bills. Private sector salaries went their worst growth in 10 years in the year 2018-19. Also, it was the first time in seven years that the share of salaries in sales revenue came down.
These results are based on an HT analysis of the Prowess database compiled by the Centre for Monitoring Indian Economy (CMIE). Prowess has 4,953 companies which have sales and salary data for the 10 years ending 2018-19. Not all of these companies have data on number of employees. However, just 3,353 of these 4,953 companies employed 8.2 million people in 2018-19.
Nominal wage and sales revenue growth of these 4,953 companies was 6% and 9% in 2018-19. Adjusted for inflation (using the Consumer Price Index for Industrial Workers), these figures are 0.53% and 3% for salary and sales growth.
What has led to this slump in wage growth in the private sector? Business has not been good for a long time. The companies listed in the Prowess database had negative real sales growth for four consecutive years beginning 2012-13.
There was a recovery in 2016-17 and 2017-18 but that seems to have reversed last year, with inflation-adjusted sales revenue growth falling from 4.5% in 2017-18 to 3% in 2018-19.
The short-lived revival seems to have led to a decision to put a squeeze on wage bills as part of a cost-cutting exercise.
Percentage share of wages and salaries in total sales revenue fell for the first time in seven years in 2018-19.
Another factor which could have encouraged companies to squeeze wages could be a rise in unemployment levels. The Periodic Labour Force Survey (PLFS) conducted by National Sample Survey Office shows that the unemployment rate reached a four-decade high of 6.1% in 2017-18. With jobs becoming scarce, the bargaining power of existing workers is bound to go down.
What does this mean for the larger economy? The combined salaries of these 4,953 companies was Rs 10.26 lakh crore in 2018, which is 12.8% of India’s total Private Final Consumption Expenditure in 2018-19.
A low sales revenue growth, lower wage growth and high unemployment rate environment is a dangerous vicious circle for any economy. Lower wage growth would adversely affect aggregate demand, which will further lower revenue growth in the future.
“These statistics only confirm what many of us have been saying for some time. The economic slowdown started much earlier, even though the government has only realised it recently”, said NR Bhanumurthy, professor of economics at National Institute of Public Finance and Policy. “The problem started with demonetisation in 2016, worsened with GST in 2017 and has been averted further by external factors”, he added.