India Falls Into A Vicious Circle Of Wage And Growth Decline

By Dr. Gyan Pathak

Slowing down of GDP growth to seven quarters low of 5.4 per cent during second quarter of the financial year 2024-25 and contraction of the wages during the same period for the first time since the pandemic (March 2021) shows that India has fallen into a vicious circle of decline in wages and the economic growth. Obviously, India needs to be rescued immediately from this vicious circle before the menace of unemployment, low-waged insecure jobs, and unpaid employment rise sharply to unmanageable level, hazarding the employment and growth aspirations of the country.

Due to fall in decline of wages, people have little money in their hand. Unemployment, low-waged employment, an unpaid employment has made the situation worse. It has resulted into drastic reduction in consumer spending resulting in even corporate profile slump. People are cutting their spending on almost everything – even from food to medicine.

Inflation-adjusted employment costs for listed non-financial companies has declined 0.5 per cent, which is a proxy for real urban wages, during the Q2 of the current financial year compared to a year ago, shows the Elara Securities Inc data. Other institutions like Oswal Financial Services Ltd have also released data showing steady slowdown in wage growth. Inflation and price rise has made the situation worse.

Decline in wages and slowdown in the Indian economy has brought a great challenge for the PM Narendra Modi led government that has been aspiring and pledged for job creation in large numbers along with pursuing high economic growth trajectory. India’s economy has slowed down more than expected to 5.4 per cent in Q2 compared to 8.1 per cent growth in the corresponding quarter last year. Economic slowdown is much lower than the Reserve Bank’s projection of 7 per cent for the period. It should also be noted that the consumption by households and businesses make up almost 60 per cent of the GDP.

Cracks have surfaced among the government’s various wings as to how this situation should be tackled. Union Ministries of Finance and Trade have been calling for interest rate cuts, but the Reserve Bank of India holding firm on its inflation target.

Government spending has also been slowed which subdued the growth. Union Government has spent only about 37 per cent of the budgeted capital expenditure compared to 49 per cent last year. Economic Affairs secretary Ajay Seth has already been reported saying that the government may “undershoot” its public spending target of RS 11.1 trillion.

In the last six months urban consumption demand across durables and non-durables has fallen as is shown in Indian companies’ performance data. Public sector’s contribution is very low during this period. Consumption growth remained sluggish owing to decline in real income growth and the rise in commodity prices.

Slowing down of economy may lead to failure of decent job creation target announced in the Union Budget 2024-25. Three schemes were announced in July worth Rs 10,000 crore expected to generate 8 million decent jobs through Employment Linked Incentives (ELI). Enterprises would be given cash incentives for every new member of the Employment Provident Fund Organisation (EPFO). The progress has been very slow so far. EPFO and the companies have been directed to complete the first stage of completion of the process by November 30, 2024, which is nothing more than Aadhaar based authentication. When the enterprises are not performing well, one can’t expect that they would create the desired number of decent jobs.

The Centre for Monitoring Indian Economy (CMIE)’s current data shows the unemployment rate in India is 8 per cent on 30-day moving average basis on November 30. Unemployment rate in 2023 was recorded by CMIE at 8.003 per cent while it was 8 per cent in 2020, the year of the pandemic COVID-19. Union Ministry of Labour and employment have always warned against this data, but government itself does not provide realtime data on unemployment. The government’s unemployment data for urban areas is delayed by three months and for rural areas we get data when the yearly PLFS report is published.

The last PLFS was released in September 2024 for the year 2023-24 (July-June) which brought down the unemployment rate by counting even unpaid workers as employed which are 19.4 per cent and were helping the household enterprises, since no paid jobs were available for them in the job market. Share of unpaid workers have risen from 17.5 per cent in 2021-22.

Another trick, applied to bring down the unemployment rate was to count even those people employed who were actually not applying for jobs after being finding no job in the market. They were simply frustrated because there was work available for them in the job market. People finding 1 hour of paid work in a week were also counted as employed. Again, those own account self-employed were counted as employed which were actually employment in disguise. There are large number of disguise unemployment also in agriculture sector.

PLFS 2023-24 showed regular wage and salaried jobs had almost remained stagnant at 21.7 per cent since last three years, when it was 21.5 per cent in 2021-22. Decline in economic growth have deteriorated it further. Due to lack of decent work working class had to accept very low-waged employments that have also brought down the income of the working class. Decline of wages added to their woes, which brought down the consumption and demand, which in return brought down the GDP growth. Slowing of the economic growth is also reducing the employment opportunities, thus making the vicious circle complete. (IPA Service)