Even as the economic recovery gains momentum, dwindling wage growth is emerging as a bigger worry as this leads to tepid demand and resultant under-utilisation of capacity, further elongating the already-large output gap, according to a report.
The households, which account for 44-45 per cent of the GVA, have witnessed their nominal wage growth declining to 5.7 per cent during FY17-FY21 from a high of 8.2 per cent during FY12-16. This means wage growth in real terms is close to just about 1 per cent, India Ratings said in a note on Thursday.
This is in spite of the overall economy growing at 13.5 per cent, much lower than consensus estimates, in the first quarter of the current fiscal.
Even the recent trend in wage growth at the rural and urban levels alludes to an erosion of the purchasing power of households. At the nominal level, wage growth in urban and rural areas was 2.8 per cent and 5.5 per cent year-on-year, respectively, but in real terms, which means adjusted for inflation, was a negative 3.7 per cent and negative 1.6 per cent in June 2022, as per the report.
Since much of consumption demand is driven by wage growth of the household sector, a recovery in their wage growth is going to be critical for a sustainable and durable recovery in private final consumption expenditure and overall GDP growth in FY23, the report added.
Since the pandemic has inflicted irreparable loss to growth, annualised growth does not provide a true picture of the recovery due to the low base of FY21 and FY22. So, , a 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 base.
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 compounded annual growth rate of the services sector shows the sharpest decline to 1 per cent during Q1FY20-Q1FY23 from 7.1 per cent during Q1FY17-Q1FY20, implying 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, although progressing, it is highly uneven.
The annualised growth in industrial output 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.
Services activity is slowly picking up as normalcy is returning after a gap of two years with most of the pandemic-related curbs gone. 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.
Another worry is the persisting inflationary pressures, the report said, adding that inflation both at consumer and wholesale levels remains still high, despite some moderation lately. 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.
And the agency expects retail inflation to stay elevated at 6.8 per cent in August due to costly cereals and services. Accordingly, it expects the Reserve Bank to continue with rate hikes in the range of 25-50 bps in the remainder of FY23.