Inferences from low growth in real wages of India Inc

Slow growth in real wages implies lack of employment generation

by Mahesh Vyas

Compensation to employees during the April-June 2017 quarter was 6.7 per cent higher than in the corresponding quarter of 2016. This is the slowest in the last ten quarters.

But we are also in low-inflation times, so this growth does not compare so badly with the recent past when adjusted for consumer prices inflation. In fact, the last two quarters show a better growth in real wages than the preceding four quarters.

Inflation-adjusted wages of listed companies grew by 4.4 per cent in the quarter ended June 2017 and by 4.7 per cent in the March 2017 quarter. This is much better than the average 3.3 per cent growth seen in the previous four quarters.

Apparently, growth in wages paid out by the corporate sector seems to have bottomed out. But, such an inference may be a bit too early to claim. Similar was the claim in 2014-15 after four years of 2-4 per cent real increases. And growth in real wages did improve to 5.6 per cent in 2014-15, but only to fall again in 2016-17 to 3.8 per cent.

Growth in wages paid by listed companies broadly mirrors that in all companies and it is therefore fair to assume that the quarterly results of listed companies do reflect the performance of the corporate sector as a whole.

At 6.7 per cent, the June 2017 quarter’s nominal wage growth continues to remain lower than the long-term 25-year average of 13-14 per cent and a median of 12-13 per cent. The same holds true for each of the past three years.

The average annual growth in real wages during the past three years (2014-15 through 2016-17) works out to 3.9 per cent, far lower than the long term annual average of 6 per cent and a median of 5 per cent. And it also compares very poorly with the real GDP growth rate of about 6 per cent during the same period.

What does this low and falling growth in real wages tell us?

The wage bills of companies rise because they hire more people and increase the wage rate. Since most companies do not provide data on employment, it is not possible to find out whether the decline in the rate of growth in wages is caused by fall in employment or in the wage rate. Or, the contribution of either in the fall.

Some surveys (eg; Aon Hewitt) indicate that the average annual increase in the wage rate is of the order of 10 per cent. It used to grow by 11-12 per cent for average performers till 2013. But, this has come down to 8-9 per cent for average performers. If this is true, and given that the average inflation rate was around 8 per cent per annum in the past five year, the 4 per cent annual real growth in wages we see from the Annual Reports of all listed and other companies implies a shrinking of the labour force employed in India Inc.

The shrinking is a logical conclusion as well. Consider the following:

We can assume that during expansionary times, both the wage rate and employment will rise. The wage rate needs to rise in real terms to attract and retain a greater supply of labour. Correspondingly, during contractionary times both will fall. But, during other times when business is neither expanding nor shrinking, only the wage rate would rise to offset inflation. Employment is unlikely to rise significantly.

These are not expansionary or contractionary times. We are in a low growth phase and so the wage rate would increase marginally above inflation to retain labour.

The 3-4 per cent increase in real wages prevalent since 2011-12, therefore, is likely to indicate no growth in net employment in the corporate sector over the past five years.

There are industries or sectors in which employment will have increased even in the recent years. This is evident from the much faster growth in wages in these industries. But, on a net basis, wages have grown only slightly above inflation and this indicates that the corporate sector as a whole is unlikely to have increased employment over these past five years.

Unemployment Rate
Per cent
5.8 -0.0
Consumer Sentiments Index
Base September-December 2015
92.6 +0.2
Consumer Expectations Index
Base September-December 2015
91.9 +0.3
Current Economic Conditions Index
Base September-December 2015
93.7 0.0
Quarterly CapeEx Aggregates
(Rs.trillion) Mar 17 Jun 17 Sep 17 Dec 17
New projects 4.06 2.14 1.22 1.12
Completed projects 1.96 0.86 1.05 0.92
Stalled projects 0.74 2.67 0.67 0.93
Revived projects 0.86 0.30 0.29 0.23
Implementation stalled projects 0.33 0.69 0.73 0.58
Updated on: 23 Feb 2018 9:20AM
Quarterly Financials of Listed Companies
(% change) Mar 17 Jun 17 Sep 17 Dec 17
All listed Companies
 Income 10.2 9.7 7.9 11.9
 Expenses 11.9 10.0 9.0 12.9
 Net profit 16.4 -19.7 -16.8 -12.3
 PAT margin (%) 6.0 5.3 5.7 5.0
 Count of Cos. 4,472 4,460 4,439 4,279
Non-financial Companies
 Income 11.8 10.3 7.7 12.7
 Expenses 15.6 10.6 7.5 11.8
 Net profit -2.2 -25.2 -4.2 13.3
 PAT margin (%) 6.1 5.2 6.4 6.6
 Net fixed assets 6.9 9.2
 Current assets 2.7 78.8
 Current liabilities 8.9 11.0
 Borrowings 4.9 10.5
 Reserves & surplus 6.1 5.2
 Count of Cos. 3,455 3,444 3,418 3,326
Numbers are net of P&E
Updated on: 23 Feb 2018 9:20AM
Annual Financials of All Companies
(% change) FY14 FY15 FY16 FY17
All Companies
 Income 10.0 5.4 1.5 6.8
 Expenses 9.9 5.5 1.7 7.1
 Net profit -2.5 0.3 -12.9 22.1
 PAT margin (%) 3.1 3.1 2.8 5.3
 Assets 12.3 9.5 10.1 8.3
 Net worth 9.7 8.5 11.7 7.4
 RONW (%) 6.1 5.9 4.9 7.9
 Count of Cos. 24,633 24,657 22,529 10,919
Non-financial Companies
 Income 9.7 4.6 0.6 6.7
 Expenses 9.4 4.8 0.0 7.6
 Net profit -3.1 -8.1 13.2 15.9
 PAT margin (%) 2.2 2.0 2.5 4.9
 Net fixed assets 11.7 13.3 17.4 7.2
 Net worth 8.3 6.9 12.4 5.4
 RONW (%) 5.0 4.7 5.1 8.5
 Debt / Equity (times) 1.1 1.1 1.0 0.8
 Interest cover (times) 2.0 1.9 1.9 2.7
 Net working capital cycle (days) 69 67 65 52
 Count of Cos. 19,858 20,066 18,861 8,566
Numbers are net of P&E
Updated on: 21 Feb 2018 10:31AM

Data added for HPI at Assessment prices and HPI at Market prices