India, the world's fastest-growing large economy, is facing a demand slowdown and sluggish wage growth is one of the key reasons behind it, an analysis by SBI Research showed.
"A substantial decline in wage growth (both rural and urban wages) in recent times resulting in lower household savings has possibly slowed down the growth in real per capita income that is holding back demand," Soumya Kanti Ghosh, chief economic adviser at SBI Research, said in a report on Wednesday.
According to the report, the reasons for the current domestic slowdown, apart from the global uncertainties, are a combination of both structural and cyclical factors.
Ghosh believes that the cyclical factors like the recent NBFC crisis, tax and sector-specific issues are also holding back current consumption.
The report suggests that in order to address the current slowdown, a combination of countercyclical measures such as sector-specific intervention, addressing tax and MSME is-sues and structural measures like expediting stressed asset resolution, reforming rural markets, addressing export competitiveness need to be implemented.
With regards to the structural factors, Ghosh said, "We believe
the most crucial factor that is reinforcing the demand slowdown is slow growth in both corporate wage and rural wage."
Corporate wage—based on company financials of 4,000 to 5,000 companies, which used to expand in high double digits (peak at 20.5 percent) post
the crisis, is now down to single digits as corporates are more conscious of cost in the midst of a massive deleveraging cycle, said SBI Research.
In a similar vein, rural wages also declined from double digits (peak at 27.7 percent) growth till FY15 to less than 5 percent in the last three fiscals.
"The bottom line is the subsequent decline in wage growth and structural changes resulted in stagnating per capita income growth (in real terms) and hence to keep the consumption expenditure at the same level, household
savings also declined," Ghosh said in the note.
According to SBI Research, factors such as declining lending by NBFCs, declining rural demand, increase in the cost of insurance etc and change in policy on axle norms led to increase in the existing carrying capacity of the
However, the slowdown in auto demand is not restricted just to India, but the impact is felt across geographies with China also facing the brunt of auto-slowdown.
For instance, China car sales declined for the 13th month in a row in July to -3.9 percent YoY. Retail numbers of car sales were worse at -5.3 percent YoY. So falling auto sales seems to be a global phenomenon with China, India, EMs.