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Is India witnessing wage inflation?

Not at all

* Employee cost of listed companies (~2,800 companies) increased by 13% YoY in 1HFY22, marking the highest growth in almost three years. The IT sector clocked an even higher growth (of 19.4% YoY) in employee expenses in 1H, with as much as 22% growth in 2QFY22. This has set off a debate on whether India is on the cusp of wage inflation. If true, this will have serious implications for the economy and financial markets. Since we have been very vocal with regard to our concerns relating to the financial position of Indian households, wage inflation may alter our thesis. In this note (Part I of the series), using various data sources, we explain why there is no reason to fear wage-led growth and inflation in India.

* Employee costs consist of two parts – employment opportunities and wage growth. The wage bill of a company can go up either because of higher employment or due to increased wages per employee (WPP). The latter will determine the extent of wage inflation. Details confirm that the higher wage bill for the IT sector has been entirely due to higher employment rather than increased WPP. Similarly, higher growth in the wage bill for Banks is also largely due to increased employment rather than WPP. Although the data on the number of employees is not available on a quarterly basis for all listed companies, it is likely that the trends are similar in the IT/Banking sectors. If so, a higher wage bill reflects better employment opportunities rather than wage inflation.

* Fears of a wage inflation can be laid to rest when we complement this with three other data points – state governments’ salary bill, MGNREGA wages, and non-MGNREGA rural (Agricultural and non- Agricultural) wages. Combined analysis of 22 states suggests that their salary and wage bill grew 10.6% YoY in 1HFY22, on a low base of 1.5% in 1HFY21, implying an average growth of 6.1% in two years, but less than half the 12.7% average growth in the preceding two years.

* Further, non-MGNREGA rural wages, based on 11/13 Agricultural/non-Agricultural activities, remained weak in AprAug’21, following a contraction in FY20 and a stagnation in FY21. Lastly, while MGNREGA spending grew 55% YoY in FY21, it was largely due to a higher number of individuals working under the scheme, rather than a huge increase in wages per person. MGNREGA wages grew 5% YoY in Apr-Nov’21, following a 10.2% YoY growth in FY21.

* A comparison of recent trends in these four indicators during FY20-1HFY22 vis-à-vis FY01-07 (low inflation) and FY08- FY14 (high inflation) periods confirms that the current wage growth is much weaker than that during the high inflation phase and more comparable or weaker than at the turn of the century.

* In conclusion, there are no signs of wage inflation in India at this stage. The question to be asked is “whether the employment growth, as suggested by IT/Banks, is substantial enough and complemented by other indicators to change the broader narrative of a weak labor market in India?” We will discuss this in Part II of this series.

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