‘IT Services Hiring Slowdown Could Mean Poor Wage Growth': ICICI Securities' Vinod Karki On the Indian Economy

With around 49 crore workers, the informal sector comprises 90% of the Indian economy. The sector is majorly dominated by agriculture and casual labor and has suffered a few setbacks, Covid-19 being one of the recent shocks. However, the sector has undergone some changes, according to a recent report by ICICI Securities.  

The structural change in the economy is part of the trend witnessed in the last few years. The informal economy's contribution has reduced to 15-20% in 2022 from 50% in 2017-18. Within the formal sector, the private corporate sector is acquiring prominence. As the ICICI Securities report indicates the private sector wage bill at approximately Rs 30 trillion has surpassed, the public sector wage bill of Rs 28 trillion for the first time.

Govindraj Ethiraj, Editor, The Core, spoke to Vinod Karki, Equity Strategist with ICICI Securities and one of the authors of this report to understand this ongoing formalisation of the economy, gaining prominence of the private sector and shifting role of the state. 

"If you analyse the trend line in the report then it is clear that it is a structural uptrend and is going to keep trending up well past the public sector," Karki said.  

On a parallel note, the government is expanding its Capital Expenditure (Capex). The capex for Budget 2023-24 is Rs 10 lakh crore which has more than doubled since 2019-20. This may kick off a virtuous cycle of jobs and growth as Vinod Karki explains "capex has a two-and-a-half times multiplier effect on demand". 

Here are the edited excerpts from the interview 

 

Could you tell us about what led to the creation of this report? 

There have been so many questions around consumption, rural consumption in particular, and also the related overall trends. The genesis of any consumption is income. That resulted in this endeavour to identify and chart the income and wage trends across the sectors in both urban and rural economies. 

 

According to this survey, the total private-sector compensation in India has just overtaken public-sector compensation. And that is surprising 

The formal sector in India has actually been quite low in the past. And of late, if you look at any number -the number that we published or the EPFO reports on the additions or the number of tax filings or the tax buoyancy from income tax - all of these are suggesting that formalization is taking effect in the economy.
To give you a perspective, in the USA, employee compensation from the private corporate sector is as high as 40%. In India, we are just reaching 13%. If you analyze the trend line in the report then it is clear that it is a structural uptrend and is going to keep trending up well past the public sector. In the USA, surprisingly, the public sector is closer to the 10% of GDP figure that we presently have. This means that over a period of time, a significant share of the wage bill will come from the private corporate sector, while the public sector will stagnate.

 

The other interesting aspect is the fact that almost 42% of the entire wage bill is actually from information technology services

If you take a sample from the listed corporations or if you look at the overall private corporate sector it is actually closer to 40%. This is a very large sum that moves the needle for India's private corporate sector wage bill. It is also a cause for worry as the slowdown in IT services hiring could also mean a not-so-great wage growth. Both of these effects might result in this area of the private corporate sector underperforming. However, going by the latest trend, it may revert. 

The good news though is that the other part of the economy, including construction, industrial, and other old economy sectors, that have been languishing for almost a decade, is actually really picking up. As we have highlighted in the report, the capex cycle in India has just started to pick up. Further, other sectors like hospitality, travel, and tourism are also coming back strongly after the pandemic problems.

 

The Employee Provident Fund (EPFO) data is used as a proxy to determine the number of people working in India's formal sector, which is only about 10%. The chart in the report says that there were about 14 million net additions to EPFO. So, what is the total number and the overall trend?

We do not have the total number of employees from the EPFO. However, if you look at the breakup, the overall workforce is close to 55 crores in India. Around 6 crores, i.e. roughly about 10-11 per cent of these people will be in the formal sector. Hence, that is the total population of the formal sector workforce. The wage bill that this group earns is growing faster than nominal GDP and we have mentioned this in the report. That is why its share as a percentage of GDP increased from 9% in 2012 to 13%, and is overtaking the public sector.

 

What does this mean in terms of consumption, propensity to spend, and so on? How are you seeing it today and what is the future outlook? 

Firstly, it has been empirically proven that if the demand is triggered initially by the capex cycle, then the capex has a two-and-a-half times multiplier effect on demand. The government too has been saying this.

See, in the IT sector there is a slowdown-not a contraction-and the growth rates will not be as high as the previous years. The startup scene too has recently seen some shake-downs. Then the bulk of the sector is also attached to the agricultural output-we are experiencing a severe weather season so far, and this can potentially affect agricultural output and rural demand. So barring these two sectors, the rest of the economy, based on how the capex plays out in terms of multiplier effect on demand, will continue to see demand. We also may have the K-shape recovery for some time. 

Yes, that is the worry I spoke about earlier. Rural is largely agriculture and there are already some risks to the agri output because of the severe weather conditions. However, if one considers the casual labourers in the rural area dependent on construction activity, those activities are related to the investment cycle. Even in the rural area, there is a reasonable amount of pickup. It is only the general salary in the rural area, which seems to be stagnating.