Wage growth: Even agriculture trumps the unorganised sector

Updated: July 4, 2019 8:52:00 AM

A study of the data spanning FY12-FY17 shows that of the total income generated in the economy, nearly one-third accrues to labour and two-thirds to capital.

agriculture, economy, indian economy, unorganised sector, government expenditure, government investment, gross domestic productMuch less attention has been paid to the analysis of national income as it accrues and gets distributed across labour and capital. (Reuters)

Sunil K Sinha & Devendra K Pant

The current discourse on economy from demand side largely revolves around the analysis of gross domestic product (GDP) and its components, namely consumption, government expenditure and investment. Similarly, from supply side, it revolves around gross value added (GVA) and its components, namely agriculture, industry and services. However, much less attention has been paid to the analysis of national income as it accrues and gets distributed across labour and capital. An analysis of national income on these lines can provide an insight into the evolving wage and wealth income, and its concomitant impact on income inequality. An IMF working paper shows that the share of labour in the national income in advanced economies is trending down since 1975. It reached its lowest level (50%) before the global financial crisis of 2008 and has not recovered significantly since then. Although reasons behind the decline in share of labour in national income are still not well-understood, authors of this paper state that, in advanced economies, it is attributed to the rapid advance of technology, and the globalisation of trade and capital. These two factors have led to steep decline in the relative price of investment goods which has lowered firms’ cost of capital and, in turn, given them incentive to replace labour with capital. Even as the reasons behind the decline in share of labour in national income of advanced economies are being studied, this decline has not only harmed consumption demand growth but has also translated into a backlash against outward looking trade policies in these economies.

Interestingly, the situation in India is different. The Central Statistics Office (CSO) provides GVA data as per four different components, namely (i) production taxes less production subsidies, (ii) consumption of fixed capital, (iii) compensation to employees, and (iv) operating surplus/mixed income both by production sector and institutions. A reorganisation of this data gives us a glimpse into the distribution of national income across the two key factors of production—labour and capital. Of the four components of GVA, only compensation to employees accrues to labour; the other three accrue to the owner of capital (including land). In case of private corporations, salaries of family labour are included in the compensation of employees. In case of households, though, it is clubbed with the operating surplus and is reported as mixed income.

A study of the data spanning FY12-FY17 shows that of the total income generated in the economy, nearly one-third accrues to labour and two-thirds to capital. This distribution has been fairly stable over this period despite wages and return on capital growing at a CAGR of 12% and 10.9% respectively.

Data at the disaggregated level presents a mixed picture. Let us first look at the sectoral classification. At the sectoral level, industry witnessed returns on capital grow faster than wages. Does this mean industrial production is becoming capital intensive and shedding labour? Or is it that wages are growing slower than labour productivity? The answer to these questions will require much more detailed work. However, since growth both in wages and return on capital across the sector classification was lowest in the industrial sector, it is a pointer that industrial sector needs to improve both its efficiency and productivity. In case of agriculture, despite share of wages growing at a CAGR of 11.1% during FY12-FY17, the labour received only 15.3% of the income, and the remaining 84.7% accrued to the owners of the capital. Also, while agriculture contributed 18.2% to the total income generated in the economy, wages in agriculture accounted only 8.4% of the total wages in the economy and only 2.78% of the GVA during this period. This translates into annual average wages of Rs 21,060 per agricultural labourer per annum (assuming the number of agricultural wage earners remains the same) which is even lower than the official poverty line.

At an institutional level classification, the wage growth of households (this includes unorganised/unregistered enterprises) was the slowest (7.7%) and that of private corporations was the fastest (16.0%) during FY12-FY17. This means that the wage earners from the household sector, whose wages are generally low, also witnessed relatively lower wage growth during FY12-FY17, indicating that the wage gap between unorganised/unregistered enterprises and organised enterprises is widening. The plight of wage earners in the household sector, who account for 44.5% of the income in the economy but receive only 26.4% of the total wage, is quite similar to that of agricultural wage earners. A further breakdown of households by production sector reveals that during FY12-FY17, the wage growth, at 5.8%, of workers classified under households and working in industrial sector is even lower than the wage growth, at 9.7%, of the workers classified under households and working in agriculture sector.

Some of the takeaways from the foregoing analysis are: (i) an income transfer programme to alleviate agricultural distress will not be meaningful as long as it does not include agricultural labourers; (ii) the low wage growth of unorganised/unregistered enterprises is a matter of concern; and (iii) a much higher proportion of the incremental public sector income is accruing to public sector employees than to the public sector capital.

(Sinha is principal economist, & Pant is chief economist, India Ratings and Research Views are personal)

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