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Trends in growth of industrial profits and wages since liberalization

LiveMint logoLiveMint 11-05-2014 Manas Chakravarty

What has been the rate of growth of industrial profits since liberalization? How much have the factory wages increased? By how much have the salaries of administrative and marketing staff gone up? What has been the share of wages in value added? The Annual Survey of Industries (ASI) provides some answers, allowing us to look beyond the current slowdown and gauge some broad trends in the country’s manufacturing sector.

Since the liberalization of the economy (taken from 1990-91 because 1991-92 saw unduly depressed profits) till 2011-12, the latest year for which ASI data are available, profits have gone up at a compounded annual growth rate (CAGR) of 19.15%. Many new firms have come up during the period while many have folded; so it’s not a measure of how profits in the average firm have increased.

Sarvesh Sharma/Mint

But we can compare it with how much wages have gone up during the period. It turns out that the growth of wages between 1990-91 and 2011-12 has been at a CAGR of 10.12%. Growth in profits has been much higher than the growth in wages. If we look at it another way, the share of wages in net value added fell from 25.6% in 1990-91 to 11.9% in 2011-12. The average rate of growth in the Consumer Price Index for Industrial Workers has been 7.3% over the period, while average wages per worker have gone up at a CAGR of 7.5%. That means the rise in real wages has been very little.

It’s important to remember that Indian industry went through a period of radical restructuring after liberalization. The net effect was that the number of workers employed in the organized industry was lower by 5.5% in 2001-02, compared with 1990-91. There had been a net reduction in employment in organized manufacturing in that decade. It was only from 2004-05 that the number of workers employed started to increase.

Did the boom years of 2003-08 make much of a difference to the broad trend? The ASI database shows profits increased at a CAGR of 36.9% between 2002-03 and 2007-08. The rise in wages, however, was a much more modest 11.4%. The boom saw profits rise far more than wages. The chart shows the sharp dip in the share of wages in net value added during the period.

What of the trends after the global financial crisis? It’s interesting to note that between 2007-08 and 2011-12, profits increased at a much lower CAGR of 10.9%. Wages, on the other hand, grew at a CAGR of 18.27%. True, a part of that increase would have been frittered away because of high inflation. But the fact remains that, in these years, profits grew at a lower rate than wages. Total emoluments, which include the salaries of administrative and marketing staff, grew at a CAGR of 19.5% during these years.

The data show that the rate of growth of profits outstripped the growth in wages by a wide margin during the boom years and it is only during the recent slump that we have seen the opposite trend. Part of the reason is the stickiness of wages, which prevents them from being adjusted downward during a slump. It’s also possible that the rise in rural real wages—seen as a result of government social programmes and the growth in the poorer states—has led to an upward pressure on industrial wages as well. High inflation could be another reason.

Within employees, there has been a divergent trend between workers, and office and marketing staff. In 1990-91, the number of workers was 76% of the total number of people engaged in factories. In 2011-12, this percentage had gone up to 77.7%. So it’s not as if there has been a sharp change in the worker to staff ratio. But look at what happened to workers’ wages as a percentage of total emoluments. In 1990-91, workers’ wages were 64% of total emoluments, with managerial, marketing, administrative staff salaries accounting for the rest (staff welfare payments and provident funds are shown separately). In 2011-12, though, workers’ wages had dropped to 46.5% of total emoluments.

Signs of distress in industrial firms are seen since 2007-08 in the rapid increase in borrowing. Borrowing by firms went up at a CAGR of 19.4% between 2007-08 and 2011-12. The rate of increase in interest outgo during these years was even more, at a CAGR of 23.7%. But for the entire period 1990-91 to 2011-12, the CAGR in loan growth was a much lower 10.9%.

While industrial conditions have no doubt worsened after 2011-12, it’s likely that in the next few years, the reversal of trends seen during the current slump will change and we shall go back to the broad trends seen since liberalization.

Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at

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