👍👍Private consumption likely to take a hit on India’s IT sector squeeze | Business Standard News

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In all, listed IT companies accounted for 47 per cent of incremental growth in India Inc’s salary and wages bill in the last 12 months

Private consumption in the country is likely to be affected because of a cutback in fresh hiring and lower pay increments given by domestic IT companies, whose salary bill continues to grow faster than that of the rest of Indian Industry.

Any slowdown in their employee expenses is expected to weigh on income growth in the economy. This can adversely affect demand for big-ticket consumer goods such as cars, high-end mobiles, home appliances, and new homes.

Listed IT companies reported a sharp cutback in net hiring in the third quarter, or October-December (Q3), of FY23 as against the July-September quarter (Q2) and even the corresponding year-ago period. The top five listed of them together added just 1,940 people (on a net basis) to their rolls in Q3FY23, down sharply from 28,836 in Q2FY23 and 61,137 people in Q3FY22.

This, coupled with expectations of lower salary increments in FY23 (increments for performance in a financial year are usually announced in April of the next one), is likely to result in much lower growth in the industry’s expenses on salaries and wages in FY24.

As a result, it is likely to pull down overall growth in the employee compensation of India Inc.

In the latest trailing 12 months’ (TTM) period ended December 2022, listed IT companies together spent Rs 3.84 trillion on their employees, accounting for 31.5 per cent of employee expenses by all listed companies, up from their 28.6 per cent share two years ago.

The salary and wage bill of listed IT companies is up 21 per cent year-on-year (YoY) in the TTM period ended December 2022, compared to 13.1 per cent growth for other listed companies on the same account in the Business Standard sample.

In all, listed IT companies accounted for 47 per cent of incremental growth in India Inc’s salary and wages bill in the last 12 months.

Banks, non-banking financial companies and insurance (BFSI) firms are the second-biggest spender on salaries and wages among listed companies. The BFSI category spent Rs 2.07 trillion on employees during the TTM period ended December 2022, accounting for 20.2 per cent of the combined salary and wage bill of all listed companies.

There has been a sharp recovery in employee compensation in the BFSI space in Q3FY23, but it is debatable if the sector can compensate for the slowdown in the IT sector.

Analysts say a combination of higher increments and a big jump in fresh hiring by the IT industry in the last two years pushed up disposable incomes in the country and played a key role in revival in consumer demand in the post-pandemic period. The surge in the number of start-ups (a majority are unlisted) in the country has also added to the trend. But now, a reversal or even a slowdown is expected to be negative for income growth and consumer demand in the country.

“Recent layoffs in the tech sector and a cutback in hiring by IT services companies will have an income effect and is negative for private consumption in the economy. If nothing else, the worsening of the job market will make people cautious and they will go slow on discretionary spending and focus on savings,” said Madan Sabnavis, chief economist, Bank of Baroda.

Though Sabnavis said the tech sector was still a small part of India’s economy, “we also have to look at the employee compensation trend in the manufacturing and the services sectors to get a better handle on income growth in the economy”.

Analysts are not optimistic about employee compensation growth in other sectors either.

“There has been a sharp decline in revenues and profit growth in the non-BFSI, non-IT sectors in Q3FY23. This will adversely affect growth in employee compensation and fresh hiring by companies in these sectors,” said Dhananjay Sinha, director and head (research and strategy), Systematix Institutional Equity.

If this happens, it will worsen the trend of a slowdown in consumer demand as visible in the Q3FY23 results of listed consumer companies. The net sales growth of FMCG, consumer durables and automotive companies (excluding commercial vehicles and tractor makers) decelerated to 14.8 per cent YoY in Q3FY23, down from 25.3 per cent YoY in Q2FY23, according to an earnings analysis of Business Standard.