Low wages are bad for economy

Absence of living wage for vast number of people is hampering Indian growth

Alok Tiwari

At a time when those in power are constantly pushing emotional narratives, it was heartening to see the government get concerned about a bread-and-butter issue. A study by Federation of Indian Chambers of Commerce and Industry (FICCI) and Quess Corp has confirmed what has been the lived experience of many citizens. While corporate profits are touching all time highs, the wages of employees in private sector are lagging. Over the four period from 2019 to 2023, the wage hike across all sectors have been less than the inflation in the same period. This means in real terms the wages have declined.

The raises given range from a measly 0.8% annually in engineering, manufacturing, processing and infrastructure sector to 5.4% in FMCG sector. India’s much vaunted IT sector has seen a wage growth of 4% while in banking and financial services sector it is just 2.8%. These figures relate to all employees. The reality is that top executives get much higher raises than rank and file. If managerial salaries are separated, the actual rise for lower cadre employees would be much lower. What is new is that government is beginning to see that this is related to overall economic growth and is asking companies to address it. GDP growth in India in last quarter plummeted to just 5.4%.

We have talked for some time about jobless growth where GDP has kept growing, but employment has not kept pace. That is because businesses achieved most of the growth through raising productivity of the existing employees through use of technology and automation. In several cases they were able to reduce staff while adding to the topline and bottom-line. Even in cases they added to the payroll it was far less than growth in overall business. This is great for the promoters and shareholders as it means higher profits.

However, it is a self-defeating path to take. Ultimately all businesses need customers to survive. It is thus in their own long-term interest to ensure that there are enough people in the society to buy the goods and services they produce. In a country like India with a huge supply of manpower, it is always possible to hire people for less. Those desperate for jobs will be willing to work for a pittance. But if this happens at scale and over a long period, it is a no brainer that a big section of society will be without any meaningful purchasing power. It will eventually be reflected in less demand for goods and services, as is happening in India.

Yes, the stock market may be booming (though not right now) and creating a handful of millionaires. We may also love to boast about rising number of billionaires created by venture capital funded startups or rampant crony capitalism. The fact remains that the ever-increasing wealth of such people means little to overall economy. More money in the hands of the already rich creates very little demand for more goods and services. It mostly goes to investment market through stock exchanges or banks, creating capital for their own or other businesses to use. But even capital is of no use if there is little mass demand in the economy. Surplus money in the hands of people lower down the chain, on the other hand, creates instant demand for goods and services as they seek to raise their standard of living.

In the last couple of decades, we have seen the rise of internet-based companies. Right from ecommerce giants to cab aggregators to food delivery to the latest fad of quick commerce. They have undoubtedly added value to the economy and brought us a whole lot of conveniences. However, their contribution to the employment scene remains questionable. They do employ a few thousand people on regular basis at managerial level and to run back-end operations, but a vast majority of people associated with them are not even employees.

These are the army of delivery persons, drivers, service providers that do the actual work. They are given fancy titles like associates or partners but in reality are the most exploited segment in the so-called gig economy. They are expected to deploy their own asset in the form of motorcycles or cars but the money they end up making is barely enough to keep them alive. The availability of utterly cheap labour is the main reason behind the staggering growth of gig economy companies in India.

On paper the employment may have risen but it has not led to a comparable creation of demand for goods and services. Nobody seriously expects an average delivery person or a cab driver to be able to afford a range of white goods for their home, much less a new a house or regular vacations on the money they make. An economy and, by extension, a country will remain stuck in poverty unless big segments of the citizens are able to afford these things through the work they do. In many ways India’s economy is moving in other direction, creating wealth for a few while increasing economic stress for many. It is telling that proportion of people employed in agriculture has increased in recent times, indicating shrinking opportunities in other sectors.

Private sector companies will not reverse this on their own. They are driven by profits and will do everything they can to maximise those. One or two good intentioned companies doing it will not succeed as they will face competitive disadvantage. It is for the government to drive the change by mandating that all companies ensure a living wage for people dependent on them, whether they call them employees, associates, or partners. This means they must be able to afford things beyond immediate survival needs. Businesses too should be happy to accept this.

This column appeared in Lokmat Times on Dec 18, 2024