The aggregate private corporate spending on ‘compensation of employees’ (COE) continues to rise ahead of nominal GDP growth due to increasing formalisation of the economy, said ICICI Securities research note authored by analysts Vinod Karki and Niraj Karnani.
Data by the national accounts statistics showed that the COE to GDP ratio for the private sector grew rapidly to 12.4% in FY21 from 9.2% in FY12 (nominal COE in the private sector was at Rs24.5 trillion in FY21). Public sector, which includes government and PSUs, have held a run-rate of 12-13% of GDP spent on COE over the past decade - particularly robust in FY20-FY21, where the private and household sector was under pressure as covid impacted economic activities.
Further, ICICI Securities note pointed out that listed private corporates show similar growth trends with the aggregate COE reaching ₹9.4 trillion on TTM basis (CAGR of 10.9% vs 9.5% for nominal GDP over FY12-FY21). Including PSU stocks, the aggregate compensation of employees (COE) for listed corporate sector on TTM basis stood at Rs12.1trillion.
Citing the national accounts data, the research note revealed that the major share of spend on COE within private corporates emanates from the category ‘real estate, ownership of dwelling and professional services’ at 40%, which should largely be IT services, followed by manufacturing at 22%, other services 10%, ‘trade, repairs and hotels’ 9% and financial services 7%. It added, "listed space private corporates show a similar trend with IT and manufacturing having the maximum share of COE."
"Long-term sectoral growth in aggregate COE in private sector over FY12-FY21 is driven by ‘IT & other services’, agriculture, financial services and communications while the drag on growth came from construction, ‘trade, repair, hotels and restaurants’ and manufacturing," the note said.
Also, the research note highlighted that a quarterly run-rate of adding 1 million net new subscribers in CY17, EPFO net new subscriber addition has jumped 4x and reached a quarterly add of around 4 million in CY22 so far. Income tax collection has also significantly outpaced nominal GDP growth since FY01 at a
CAGR of 15.3% (Income tax collection of ₹6.4 trillion in FY22 till 16th Mar’22). Number of individuals filing returns with salary income has risen from 11.8mn in FY12 to 29 million in FY18.
Moreover, ICICI Securities note further added that the number of individuals with salary income filing returns has been rising and their average reported salary income works out to ₹0.7 million per year in FY18 compared to the per capita income of ₹0.13 million per year for the same year. Basis FY21 data from listed corporates, the reported average cost per employee works out to Rs0.9 million and the overall strength of the listed corporate sector based on available data is around 7.6 million employees in FY21.
However, aggregate compensation of employees (COE) in the unorganised sector (households) underperforms nominal GDP growth. As per the note, COE in the informal segment (households) underperformed with its share of GDP dropping from 8.8% in FY12 to 7.2% in FY21 exacerbated by the impact of covid on contact intensive segments of the economy.
As per the ICICI Securities analysts, the trend of rising aggregate compensation of employees (COE) to GDP ratio of the private sector (12.4% in FY21)
appears structural as formalisation increases. In the US, private sector COE/GDP ratio is above 40% while the government COE / GDP ratio is around 10%. Near term trajectory appears positive going into FY23, with annual salary surveys by various agencies indicating salary increase of around 9% for India Inc along with reports of robust hiring in the formal segment.
They added, new formal job creation should improve given the additional tailwinds of reopening post covid restrictions in contact-intensive sectors, pick-up in real estate construction activities, infrastructure development, manufacturing driven by export demand and PLI, high demand for IT and digital service professionals and the natural progression of formalisation seen over the past decade.
"Faster than nominal GDP expansion of COE for the private corporate sector indicates clear sign of formalisation of the economy and improving productivity which, along with the significantly high per capita income of this segment, is positive for the gross savings rate and discretionary consumption within this segment,' the duo added.
However, ICICI Securities analysts also note that t the formal sector’s contribution to the overall workforce is significantly low at 11% or 58.9mn workers and, despite its fast expansion, the informal segment in the economy has the lion’s share at 89%. Low income profile of the informal workforce is a challenge for aggregate demand, especially in an environment of rising inflation.
Following are the top picks of ICICI Securities from the perspective of channelising savings, credit demand and discretionary consumption from the growth in formal sector employment:
Savings & credit growth - SBI, Axis Bank, HDFC Bank, Aditya Birla Capital, SBI Life, SBI Cards and Payments Services.
Leisure & lifestyle- Indian Hotels, Trent, Sapphire Foods, Inox Leisure.
Real estate, building material & appliances - Phoenix Mills, Brigade enterprises, Havells, Green Panel Industries.
Auto - Maruti, Eicher Motors, TVS Motor.
