Corporate Employees Can Earn Better If Govt Stops Intervening

A report jointly prepared for the government by FICCI and Quess Corp Ltd shows that between 2019 and 2023 corporate profits grew four times the rise in employees’ income. Policy makers blame this disparity for the sluggish demand and, consequently, the lower growth rate in the second quarter. The inference is wrong as it is also fraught with wrong policy response, which could lead to more regulation. Attributing the challenge of low growth in a quarter solely to this disparity reflects a misdiagnosis rooted in a socialist outlook.

One should remember that the growth in corporate profits is often a sign of efficiency, innovation and competitiveness within the private sector. Profitable businesses reinvest earnings into expansion, research and development and technological advancements. This reinvestment not only creates jobs but also drives economic progress. Moreover, higher profitability enhances tax revenues, which the government can use to fund public goods and social welfare programs. But Chief Economic Advisor V. Anantha Nageswaran has a different viewpoint. Speaking at Assocham’s Bharat @100 Summit, he favoured a better balance between the share of income going to capital in terms of profits and the share of income going to workers as wages.

“Without that, there will not be adequate demand for purchase of corporates’ own products. In other words, not paying workers, or not hiring workers enough, will end up being actually self-destructive or harmful for the corporate sector itself,” he said. The idea that surge in profits should be commensurate with wage rise is noble, but it may not be feasible. Profit growth is predicated upon a variety of factors like the market conditions, operational efficiencies and technological adoption.

The rise in wages and salaries, however, are dependent on many external factors like the state of the economy, unemployment rate, and government policies and geo-economics conditions. Wages and incomes are best left to the play of market forces. In a free-market economy, to which post-liberalisation India is committed, wage levels are influenced by the forces of supply and demand. Workers’ incomes rise when there is high demand for labour and when employees enhance their productivity through skill development. Market-driven wage determination ensures resource allocation is efficient, encouraging businesses to operate competitively.

Moreover, government-mandated wage increases or restrictive labour regulations could have unintended consequences. For instance, such interventions can deter businesses from hiring, particularly in labour-intensive sectors, thereby exacerbating unemployment. Additionally, higher labour costs might compel companies to substitute workers with automation, further reducing job opportunities. The long-term outcome of such interventions is often counterproductive, stifling innovation and reducing overall economic growth. When labour regulations become too strict, companies stop investing, or even shut down their operations in geographies where controls are too high.

This happened in West Bengal when communists ruled it for 34 years from 1977. Instead of contemplating policy directives to India Inc to pay more to employees, the decision makers would do well by encouraging investments in skill development, education and training so that workers are empowered to earn higher wages. Thankfully, work has already begun in this direction. In her last Budget, Union Finance Minister Nirmala Sitharaman announced internship and skilling schemes to boost employment. The government must focus on these schemes—and discard any idea of intervention to increase wages.