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MOSL: Fuel or Engines (Economy)-Recovery in manufacturing investments will take more time-Low profit share doesn’t inspire confidence

Fuel or Engines (Economy): Recovery in manufacturing investments will take more time; Low profit share doesn’t inspire confidence

Classical economists taught us the importance of the functional distribution of income – division of national income among four key factors of production – namely, labor, land, capital and entrepreneur. The labor income share refers to the part of national income allocated to labor compensation. In recent years, there is growing evidence of a secular decline in labor share, and thus, rising inequality in developed economies; however, the experience in the organized manufacturing sector of the Indian economy is not similar. According to the recently released Annual Survey of Industries (ASI) data for FY16 (provisional), the labor share in GVA (gross value added) has risen to 28.4% in FY16, marking the highest level in 12 years. This implies that labor costs are outpacing labor productivity, which may act as a deterrent for faster employment growth in the organized manufacturing sector. Further, the profit share (to the entrepreneur) has fallen to ~40% in FY16, down from its peak of ~54% in FY08. Historical data suggest that employment in India’s organized manufacturing sector is highly positively correlated with the profit share and the former has grown at the fastest pace when the latter has been on an upward trend or stayed at ~50% of GVA. Further, investments in the organized manufacturing sector also move in tandem with the profit share with a lag of one year. If so, it will take some more time for manufacturing investments to witness a meaningful recovery in India.