Rise in services help widen gap between pvt and public sector compensation in FY23

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Despite the impact of the pandemic, the year 2022-23 witnessed compensation in the private sector in the country rising to 22% of the GDP, a new high, compared to the 21.2% in 2021-22, The Economic Times has reported. As a result, the gap between private and government sector packages have also widened, the report stated.

For the study, private corporations and households were included in the private sector, while the public sector encompassed public sector enterprises and general government.

The total compensation of employees attached with private businesses climbed to 13.5% of the GDP in 2022-23. Simultaneously, households representing the informal sector saw their wages rising to 8.5% of the GDP – a nine-year high. Incidentally, in 2021-22, while employee contribution in the private sector stood at 12.8% of the GDP, that in household was 8.4%.

An expansion in the services sector could have contributed to the rise in payments in the private sector, said experts. The chief economist at Bank of Baroda, Madan Sabnavis said, “The higher compensation ratio can be attributed to the fact that the scope of services in GDP has risen while industry is down. Typically, services have a higher component of labour, which increases share.”

In sharp contrast, employee compensation in government enterprises declined to 11.2% of the nominal GDP its lowest level in the past 12 years. This figure stood at 12.4% in 2011-12. On another parameter – aggregate income of state, central and local government employees as a percentage of total economic output – it dropped to its lowest level 7.9% in 2022-23 – the lowest level in six years. It had hit a peak of 8.8% in 2020-21.

Explaining the fall in compensation of employees of PSUs and government departments – from 19.4% of the GDP in 2021-22 to 19.1% in 2022-23 – the BoB economist said, “It is a case of retired staff not being replaced. Hence, employment levels are coming down. Functions are also out sourced, like security and housekeeping, which go as admin expenses.

In 2011-12, public sector compensation stood 2.4 percentage points higher than that of the private sector. But in 2022-23, the share of the private sector compensation was 2.8 percentage points higher than that of the public sector.

Experts also pointed to the impact on inflation as a factor in the rise of the nominal compensation in the private sector in 2022-23, a year when retail inflation went up to 6.7%. “Higher inflation amidst modest demand for unincorporated enterprises would have resulted in lower salary outgo,” senior analyst at India Ratings, Paras Jasrai, told the newspaper.

There is another prism to look at the relative shrinkage of the public sector. The contribution of the public sector enterprises in value-added came down from 16.2% of the GDP in 2021-22 to 15.9% in 2022-23.