Even as the economic recovery gains momentum, waning wage growth is emerging as a bigger concern as it leads to tepid demand and energy shortages, further extending the already large production gap, according to one report.
Households, which account for 44-45 percent of total value added, saw nominal wage growth decline to 5.7 percent during FY2017-FY21 from a rise of 8.2 percent during FY12-2016. This means wage growth in real terms is close to only about 1 per cent, India Ratings said in a note on Thursday.
That’s despite macroeconomic growth of 13.5 percent, well below consensus estimates, in the first quarter of the current fiscal year.
Even the recent trend in wage growth at the rural and urban levels hints at an erosion of household purchasing power. At the nominal level, urban and rural wage growth was 2.8 percent and 5.5 percent year on year, respectively, but in real terms, which means the rate for inflation, it was negative 3.7 percent and negative 1.6 percent in June 2022, according to the report. .
The report added that since much of the consumer demand is driven by wage growth in the household sector, a recovery in their wage growth will be critical to achieving a sustainable and lasting recovery in private final consumer spending and overall GDP growth in FY23.
Since the pandemic has caused irreparable losses to growth, annual growth does not provide a true picture of recovery due to the low base of FY21 and FY22. So, the best way to assess recovery in GDP/GVA is to compare Growth trend taking the pre-pandemic period as a basis.
Accordingly, GDP shows a compound annual growth rate of just 1.3 percent during Q1 FY20 to Q1 FY23 versus 6.2 percent during Q1 FY17 to Q1 FY20.
Among all sectors, the services sector CAGR shows the largest decline to 1 percent during Q1 FY20 to Q1 FY23 from 7.1 percent during Q1 FY17 to Q1 FY20 , which means that the recovery in the sector remains the weakest, says Paras Jasrai, an analyst at the agency.
Economic activity in sectors such as industry, although advanced, is very uneven.
Annual growth in industrial output came in at 12.3 percent in the first quarter of FY23, but on a sequential basis, it contracted by 0.1 percent in June 2022. Even when compared to the pre-pandemic level (February 2020), although the majority now Above the pre-pandemic level, non-durable consumer goods are still lagging, with production at only 95.1 percent of the pre-pandemic level.
Services activity is slowly recovering with normalcy returning after a two-year hiatus with most of the epidemic-related restrictions gone. Cargo (ports and airlines) and freight (rail) traffic grew in the range of 8.3-15.1 percent in July 2022, but passenger traffic (for both air and rail) still tracks the pre-pandemic level in July 2022.
Another concern is persistent inflationary pressures, the report said, adding that inflation at both the consumer and wholesale levels remains high, despite some moderation recently. Retail and wholesale inflation recorded 6.7 percent and 13.9 percent, respectively, in July 2022, down from peaks of 7.8 percent in April and 16.7 percent in May 2022.
The agency expects retail inflation to remain high at 6.8 percent in August due to higher prices for grain and services. Accordingly, you expect the Reserve Bank to continue raising rates in the range of 25-50 basis points for the remainder of fiscal year 23.
(This story has not been edited by the NDTV crew and is automatically generated from a shared feed.)