Disparity between corporate profit, wages pose risk to economy: Survey

New Delhi: Growth in corporate profits needs to be commensurate with wages to boost the economy, Economic Survey 2024-25 said, noting that sharp disparities between the two pose risk to the economy by curbing demand.

The document tabled in Parliament on Friday noted that while the labour share of GVA (gross value added) shows a slight uptick, the disproportionate rise in corporate profits—predominantly among large firms—raises concerns about income inequality.

A higher profit share and stagnant wage growth risk are slowing the economy by curbing demand, it pointed out.

Sustained economic growth hinges on bolstering employment incomes, which directly fuel consumer spending, spurring investment in production capacity, it stated.

To secure long-term stability, a fair and reasonable distribution of income between capital and labour is imperative, it suggested.

It is essential for sustaining demand and supporting corporate revenue and profitability growth in the medium to long run, it pointed out.

It noted that corporate profitability soared to a 15-year peak in FY24, fuelled by robust growth in financials, energy, and automobiles. Among Nifty 500 companies, the profit-to-GDP ratio surged from 2.1 per cent in FY03 to 4.8 per cent in FY24, the highest since FY08.

Large corporations, especially in non-financial sector, significantly outperformed their smaller peers in profitability, it pointed out.

However, it stated that while profits surged, wages lagged.

A striking disparity has emerged in corporate India: profits climbed 22.3 per cent in FY24, but employment grew by a mere 1.5 per cent. State Bank of India (SBI) analysis reveals that 4,000 listed companies recorded a modest 6 per cent revenue growth.

At the same time, employee expenses rose only 13 per cent-down from 17 per cent in FY23 - highlighting a sharp focus on cost-cutting over workforce expansion, it stated.

Despite Indian companies achieving a stable EBITDA margin of 22 per cent over the last four years, wage growth has moderated. This uneven growth trajectory raises critical concerns.

Wage stagnation is pronounced, particularly at entry-level IT positions.

Citing an example it stated that Japan succeeded in industrialisation and in becoming a developed economy, despite its defeat in WW II (world war II) through a social contract between the government, the businesses and workers.

It noted that Japanese workers, consumers, and retirees all subsidised industrial development by overpaying for goods and services, by taking home a lower share of national output than their counterparts in the West, and by using a financial system designed to transfer purchasing power from households to businesses.

Japanese companies returned the favour by upgrading the country’s manufacturing base, passing along productivity gains to workers, and refraining from excessive executive pay, while the government invested in top-tier infrastructure, it noted.

It noted that driven by robust post-pandemic recovery and increased formalisation, labour market indicators in India have improved substantially in the last few years.

As per Periodic Labour Force Survey (PLFS), the unemployment rate in India has dropped significantly and labour force participation and the worker population ratio have shown considerable improvements.