Amid worries over employment and household incomes gaining centre stage, it is pertinent to assess India’s changing political economy and fiscal stance.
We consider the recently released survey data of urban workers (Periodic Labour Force Survey or PLFS) and households (RBI Consumer Confidence, CC) along with the contextualisation of industry-level data, retail lending of banks, ITR filing, rural wages, government revenue spending, and corporate spending on employee compensation.
Urban PLFS show poor work quality
The urban PLFS data (1QFY25) indicates a sequential decline in both the labour force participation ratio and worker population ratio due to a fall in the ratios for women outweighing the rise for men.
The QoQ decline in the male unemployment rate from 6.1% to 5.8% (Q1 FY25) is due to a rise in casual work mainly in the service sector. Conversely, the female unemployment rate increased to 9% (Q1 FY25) on the back of a decline in the proportion of self-employed and casual work predominantly in the agriculture and service sectors.
The annual average data indicates that there is a rising dependency on self-employed work by both males and females. And there has been a sustained decline in manufacturing.
RBI’s survey shows households are less optimistic: The Reserve Bank of India (RBI)’s bi-monthly Consumer Confidence Survey (CC, July 2024) capturing urban population shows that the net proportion of respondents citing a rise in income fell to -0.3% in July 2024, following a brief and shallow recovery to a peak of 6% in March 2024. Taken along with the rising proportion of people experiencing a rise in prices (92.6% on a net basis), the real income appears to have been impaired further.
As a result, an increasing number of consumers are spending more on essential items. 76% of net respondents experienced a rise in spending, contributed by essential spending at 85.1% and non-essential spending at -5.4% on a net basis.
Average real income of IT filers contracted in FY24
The ITR data shows that the average income for individuals plus Hindu United Family (HUF) stood at Rs 8.2 lakh, which decelerated to 4.5% YoY in FY24 from 11.9% a year back and contracted by 0.9% in real terms. With this, the average real income growth over the five and ten years stands at 0.1% and 1.1% respectively. Incomes from salary, business and other incomes (interest on deposits, perks, etc), which contribute to 95% of the total income, have also remained flat in real terms.
The flatness in real incomes can be traced to the slow average sales growth and capital deepening causing muted spending levels on employees. Spending of non-finance companies on salaries and wages decelerated to 6.3% (Q1FY25) from the post-pandemic peak of 16.5% (Q1FY23).
Rural real wages dip into negative zone again: Coupled with the depressed remittances from urban areas, rural disposable incomes have also been impacted by aggressive fiscal consolidation.
The Union government’s revenue spending net of interest payments has seen a contraction of 4.9% over the four quarters ending 1QFY25. Fiscal consolidation is driven by reducing the revenue expenditure and increasing the tax incidence on the households. Consequently, rural worker wages contracted by 0.71% YoY in July 2024 in real terms following an average of 0.35% in 2023. Similarly, a sharp deceleration is seen in MNREGA real (-0.9% in July 2024 from 2.2% in December 2023).
The decline in real rural wages contrasts with the high price realisation on farm products reflecting the impact of peak levels of disguised unemployment, especially in the agriculture sector. The normal monsoon and higher acreage this year is a silver lining for rural income.
Kharif sowings have bounced back from the initial lag, recording an increase of 2.7% YoY compared to last year. The sowing of rice remained elevated at a 5.6% YoY rise (36.9mn hectares) along with maize, arhar, moong, and soyabeans while cotton had a disappointing sowing season recording a decrease of 9.1%.
Normalising K-shaped amid falling household demand: The post-pandemic K-shaped recovery that had sustained till recently is now beginning to normalise with the premium segments also experiencing a decline in volumes along with the value segment.
Sales of passenger Vehicles (PVs) declined by 9.5% (seasonally adjusted) from the recent 12-month peak, with cars and vans (value segment) declining by 18% and MUVs (premium segment) contracting by 5.5%.
On a YoY basis, the overall PV sales have declined by 2% while MUVs have decelerated to 4.1% from 32% in July 2023. Media reports indicate that stockpile PVs have reached over 7 lakh units (FADA), valued at around Rs 73,000 crore, thereby causing automakers to scale back production and offer heavy discounts.
For consumer staples, most companies reported moderate revenue/volume growth in 1QFY25 with sales growth impacted both by weak volume growth and price cuts.
Companies are pinning their hopes on a recovery in rural demand and festival season, but the prevailing household situation and retail credit tightening do not indicate a promising outlook. Rising populism may accelerate government spending, especially at the state level, and may result in other fiscal adjustments to uplift real income, particularly in rural areas. But for the moment, falling real household income that captures 78% of GDP will continue to be a drag on the real GDP growth.
Dhananjay Sinha is co-head of Equities and head of Research of Strategy and Economics at Systematix Group.
