Stagnation of Real Wages, Incomes, and Savings in India.....

India's robust GDP growth in recent years masks a critical underlying issue: the stagnation of real wages, incomes, and household savings for a large segment of the population. This trend, evident in both formal and informal sectors, is primarily driven by high inflation, an excess supply of low-skilled labor, and a shift towards informal and contractual employment, leading to a rise in household debt and the potential for a debt-driven bubble.

Reasons for Stagnant Wages, Incomes, and Declining Savings

Stagnant Real Wages and Incomes

Inflation Outpacing Wage Growth: The primary reason is that rising consumer prices have eroded the purchasing power of nominal wages. Real wages for salaried workers were 1.7% lower in the June 2024 quarter compared to the June 2019 quarter. For casual laborers in rural areas, annual real wage growth has been close to zero or minimal over the last decade.

Excess Labor Supply and Skill Gaps: A large workforce entering the job market, coupled with a lack of quality education and relevant skills, means the supply of labor often outstrips demand for quality jobs. This reduces the bargaining power of workers and keeps wages down, especially at entry and mid-levels.

Informal and Contractual Work: There is an increasing reliance on temporary, gig, and self-employed workers, who generally receive lower pay and fewer benefits than permanent employees. The share of self-employed workers increased from 53.5% in 2019-20 to 58.4% in 2023-24.

Depressed Private Sector Investment: Stagnant private investment in manufacturing and other labor-intensive sectors leads to slower job creation and, consequently, limited wage growth.

Declining Household Savings

High Consumption Needs: With stagnant incomes and rising costs of essentials (rent, education, healthcare), households are allocating a larger portion of their income to daily expenses, leaving less for savings.

Shift to Debt for Consumption: To bridge the gap between income and expenses, households are increasingly resorting to credit. Household liabilities peaked at 6.4% of GDP in FY24, near a 17-year high, reflecting a reliance on borrowing for consumption rather than asset creation.

Low Real Interest Rates: Traditionally popular savings instruments like bank fixed deposits have offered real interest rates that barely beat inflation, making them less attractive and pushing people towards riskier, market-linked investments (equities, mutual funds) or physical assets (gold, real estate).

Changing Investment Patterns: The shift towards less liquid physical assets or volatile financial markets, combined with a "You Only Live Once" (YOLO) mindset and easy digital credit access, further reduces traditional, steady savings pools.

Path to Higher Debt and Potential Bubble

The combination of stagnant real incomes and rising consumption, often funded by easy credit, leads to a significant increase in household debt. The household net financial savings rate fell to a near five-decade low of 5.1% of GDP in FY23, while household debt as a percentage of GDP has climbed. This increased leverage, especially in unsecured loans, raises concerns about financial stability and the risk of a debt-driven consumption bubble, similar to the 2008 US subprime crisis.

Ways to Increase Real Wages, Incomes, and Savings

Addressing this requires a multi-pronged approach focusing on structural reforms:

Skill Development and Quality Education: Investing heavily in quality education and targeted skill development programs can bridge the gap between labor supply and demand for skilled jobs, thereby increasing productivity and wages. The government's existing skill initiatives need to be more effective and cover a wider range of the workforce.

Formalization of the Economy: Encouraging the growth and formalization of small and medium enterprises can provide more stable jobs with better pay and social security benefits, transitioning workers from the vulnerable informal sector.

Boosting Private Investment: Creating a favorable environment for private sector investment, particularly in labor-intensive industries, is essential for generating quality employment and stimulating wage growth.

Strengthening Social Security Nets: Expanding access to affordable health insurance, pension plans, and other social welfare schemes provides a financial safety net, reducing the need for households to borrow during emergencies and encouraging long-term savings.

Promoting Financial Literacy and Inclusion: Educating households about personal finance, risk management, and the benefits of formal savings products can help them make informed financial decisions. This includes the development of user-friendly, tailored savings products for rural and low-income populations.

Macroeconomic Policies:

Inflation Management: Keeping inflation in check is crucial to preserve the purchasing power of incomes and savings.

Tax Incentives: Offering better tax incentives for long-term savings like the Public Provident Fund (PPF) or pension schemes can make them more attractive.

Wage Protection: Implementing and enforcing effective wage protection laws and linking wage adjustments to inflation can ensure sustainable income growth.

India's current economic trajectory, characterized by high GDP growth alongside stagnant real wages and declining household savings, poses a significant risk to long-term stability. The resulting surge in household debt is a coping mechanism for financial strain, not a sign of prosperity. By implementing comprehensive structural reforms focused on human capital development, formal job creation, and robust financial safety nets, India can foster inclusive growth that translates into tangible increases in real incomes and savings for all its citizens, safeguarding the economy from potential debt crises and ensuring a sustainable future.