india ratings: Wage growth squeeze emerging as bigger worry in India: India Ratings

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Dwindling wage growth is emerging as a bigger headache despite economic recovery gains as it leads to tepid demand and results in under-utilisation of capacity, further widening the output gap, India Ratings said in a note on Thursday.

According to the report, households accounting for 44-45 per cent of the GVA have witnessed a decline in nominal wage growth to 5.7 per cent during FY17-FY21 from a high of 8.2 per cent during FY12-16, implying that wage growth in real terms is close to just about 1 per cent.

This worrying trend comes despite India seeing an overall economic growth of 13.5 per cent in the first quarter of the current fiscal.

The decline in wage growth at both the rural and urban levels translated into lower purchasing power of households.

At the nominal level, urban and rural areas saw 2.8 per cent and 5.5 per cent wage growth in year-on-year, respectively, but in real terms, which when adjusted to inflation, was a negative 3.7 per cent and negative 1.6 per cent in June 2022, as per the report.

The report said that the recovery in wage growth is going to be critical for a sustainable and durable recovery in private final consumption expenditure and overall GDP growth in FY23 as much of the consumption demand of the household sector is driven by it.

The report further said the better way to assess the recovery in GDP/gross value added (GVA) is to compare the growth trend taking the pre-pandemic period as the annualised growth does not provide a true picture of the recovery due to the low base of FY21 and FY22.

Accordingly, GDP shows a compounded annual growth rate of just 1.3 per cent during Q1FY20 – Q1FY23 against 6.2 per cent during Q1FY17 – Q1FY20.

Among all the sectors, the services sector shows the sharpest decline in the compounded annual growth rate to 1 per cent during Q1FY20-Q1FY23 from 7.1 per cent during Q1FY17-Q1FY20, which means that the recovery in the sector is still the weakest, says Paras Jasrai and analyst at the agency.

Economic activity in sectors such as industry are highly uneven.

In the industrial output, annualised growth came in at 12.3 per cent in Q1 FY23, but on a sequential basis, it contracted 0.1 per cent in June 2022. Even when compared with the pre-pandemic level (February 2020), although the majority of the sectors are now above the pre-pandemic level, consumer non-durables is still lagging, with output only at 95.1 per cent of the pre-pandemic level, the report said.

With most of the pandemic-related curbs gone, services activity is slowly picking up as normalcy is returning after a gap of two years . Cargo (ports and airways) and freight (Railways) traffic have been growing in the range of 8.3-15.1 per cent in July 2022 but passenger traffic (for both air and rail) still trails the pre-pandemic level in July 2022.

The report also said that despite some moderation, high inflationary pressures at both the consumer and wholesale levels is also worrying.

India’s retail and wholesale inflation came in at 6.7 per cent and 13.9 per cent, respectively, in July 2022, down from the peak of 7.8 per cent in April and 16.7 per cent in May 2022.

The agency expects the retail inflation to stay elevated at 6.8 per cent in August due to costly cereals and services.

Accordingly, it expects the central bank to continue with rate hikes in the range of 25-50 bps in the remainder of FY23.

(With inputs from PTI)

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