The Economic Survey on Friday cautioned private firms against underpaying employees and asked them to strike a balance between capital and labour in their own interest because fairer income distribution would boost consumption, accelerate growth and help businesses thrive.
Private sector plays “a very big role” in a large economy, said chief economic adviser V Anantha Nageswaran, the architect of the survey. Pointing at “huge disparity” between growth in corporate profits and growth in wages, he said: “This has been highlighted by several private sector themselves in the last few months,” he said underscoring corporate profitability at 15-year high in March 2024.
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“In some sense, raising wage and salary growth for workers is also a source for aggregate demand for businesses…,” he said. In order to bring home his point of view, he cited an example. “Some of you may have heard that in 1960 when Henry Ford raised the minimum wages of his car workers, he said – otherwise, there will not be enough people to buy the cars Ford Motors produces,” he said.
According to the survey, corporate profitability soared to a 15-year peak in FY24, fuelled by robust growth in financials, energy, and automobiles. Among Nifty 500 companies, the profit-to-GDP ratio surged from 2.1% in FY03 to 4.8% in FY24, the highest since FY08. Large corporations, especially in non-financial sectors, significantly outperformed their smaller peers in profitability. “However, while profits surged, wages lagged,” it said.
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“Despite Indian companies achieving a stable EBITDA margin of 22 per cent over the last four years, wage growth has moderated. This uneven growth trajectory raises critical concerns,” the Survey said.
Wage stagnation is pronounced, particularly at entry-level IT positions. While the labour share of GVA shows a slight uptick, the disproportionate rise in corporate profits—predominantly among large firms—raises concerns about income inequality. “A higher profit share and stagnant wage growth risk slowing the economy by curbing demand,” it said.
Sustained economic growth hinges on bolstering employment incomes, which directly fuel consumer spending, spurring investment in production capacity. To secure long-term stability, a fair and reasonable distribution of income between capital and labour is imperative, it said.
Citing example of Japan, the Survey said, It is essential for sustaining demand and supporting corporate revenue and profitability growth in the medium to long run. Japan succeeded in industrialisation and in becoming a developed economy, despite its defeat in WW II through a social contract between the government.
“Japanese workers, consumers, and retirees all subsidised industrial development by overpaying for goods and services, by taking home a lower share of national output than their counterparts in the West, and by using a financial system designed to transfer purchasing power from households to businesses. Japanese companies returned the favour by upgrading the country’s manufacturing base, passing along productivity gains to workers, and refraining from excessive executive pay, while the government invested in top-tier infrastructure,” it quoted Matthew C. Klein and Michael Pettis in “Trade Wars are Class Wars”.