Slower corporate wage growth impacts consumer demand in India

Effects of single-digit salary growth for 3 qtrs on consumer spending are now palpable

The slowdown in consumer demand in recent quarters can be traced to a deceleration in salary and wage growth across corporate India. Listed companies are now reporting wage growth in the low single digits, a sharp departure from the double-digit increases seen until the last financial year.

 

Historically, net sales growth for consumer goods companies has closely tracked the growth in salary and wage expenses of listed firms, making the current trend a potential drag on broader consumption.  

In the July-September quarter (Q2FY25), the combined salary and wage expenses of 3,515 listed companies in the Business Standard sample grew 7.7 per cent year-over-year, down from 14.2 per cent in the same period a year earlier. While this represents a slight improvement from the 7.2 per cent growth seen in Q1FY25, it marks the third consecutive quarter of single-digit uptick. 

Between Q1FY22 and Q3FY24, these expenses had grown in double digits for 11 straight quarters.  

 

 

Total salary and wage expenses of listed companies rose to Rs 3.96 trillion in Q2FY25, up from Rs 3.68 trillion a year ago and Rs 3.88 trillion in Q1FY25.  

The slowdown in salary and wage expenses is particularly evident in sectors, such as IT services and banking, financial services and insurance (BFSI). Major IT services exporters, including Tata Consultancy Services, Infosys, Wipro, and HCL Technologies, reported just a 4.9 per cent year-over-year increase in employee costs in Q2FY25, down from 9.5 per cent a year earlier. The sector accounts for 29 per cent of the overall wage bill of listed companies, amplifying the impact of slowdown in employee expenses.  

BFSI firms have also experienced deceleration. After seven consecutive quarters of double-digit growth, these companies saw their combined salary and wage expenses rise just 8.1 per cent year-over-year in Q2FY25, compared to 27.3 per cent a year earlier. Together, the IT and BFSI sectors accounted for 51.3 per cent of total salary and wage expenses of listed firms in the quarter.  

The apparent impact of slowing wage growth on consumer-facing sectors is palpable. Fast-moving consumer goods companies, including Hindustan Unilever, ITC, Nestlé India, Colgate-Palmolive (India), and Britannia Industries, reported net sales growth of 6.6 per cent year-over-year in Q2FY25, their sixth straight quarter of single-digit expansion. While this marks an improvement over 5.3 per cent growth in Q2FY24 and 5.1 per cent in Q1FY25, it highlights a prolonged demand slowdown. NielsenIQ’s latest FMCG Quarterly Snapshot for Q3 2024 showed the slowest value growth for large FMCG companies, with volumes declining during the July-September period. 

 

The automotive sector is also struggling. Listed automakers saw net sales rise just 2 per cent year-over-year in Q2FY25, a sharp drop from 23.7 per cent in Q2FY24 and the slowest growth in 10 quarters. Consumer durables and retail companies, including Havells India, Voltas, Bajaj Electricals, Avenue Supermarts, and Trent, reported a 16.8 per cent year-over-year increase in net sales in Q2FY25, an improvement over 12 per cent a year earlier but a deceleration from 21.4 per cent in Q1FY25. 

 

“The slowdown in consumer spending can be partly attributed to slower growth in employee expenses,” says Madan Sabnavis, chief economist at Bank of Baroda. “As companies cut back on salary hikes and hiring, income growth takes a hit, dampening consumption.”

 

Rising retail inflation in recent months has compounded the challenge, he added. India's retail inflation rate increased to a 14-month high of 6.21 per cent annually in October, up from 5.49 per cent the previous month. The Reserve Bank of India aims to keep inflation within a range of 2-6 per cent, with a medium-term target of 4 per cent.

 

Urban areas have felt the pinch more acutely. “In their second-quarter results, most consumer goods companies flagged weak demand in urban areas, which can be attributed to a slowdown in corporate salary and wage growth,” says Dhananjay Sinha, co-head of research and equity strategy at Systematix Institutional Equity. 

 

Weak consumer demand may persist for a few more quarters, given the lagged effect of slowing corporate revenues and profits on employee expenses, he adds.