Smaller Take-Home Salaries to Hit Consumption

Chennai: Broadening the wage base under the new Labour Codes will lead to higher statutory deductions and shrink the take-home salaries of employees. This could negate the benefits the country had accrued through the GST reforms, which increased consumption.

The new Labour Codes have redefined wages to include basic pay, dearness allowance (DA), and a retaining allowance. It also says that these components should constitute 50 per cent of an employee’s total cost-to-company.

“Usually, the components that are defined as wages account for 35-40 per cent of the cost-to-company of an employee. When the share of these components go up to 50 per cent of CTC, consequently his/her contribution towards provident fund will also go up,” said Rohitaashv Sinha, partner, King Stubb & Kasiva.

As per the current norms, 12 per cent of the wages has to be deducted towards PF contribution, while an employee is at liberty to make a higher contribution if he wishes to do so. However, the contribution by the employer towards an employee’s provident fund can be limited to Rs 15,000 per month.

“A 10-15 per cent increase in the wages will see a similar increase in the mandatory PF contribution by the employee and this will shrink an employee’s take-home salary,” said Sinha.

A lesser take-home salary will reduce consumption by the salaried class.

The middle strata of the society accounts for 60 per cent of the consumption in India and this is the strata, which will get affected when the disposable incomes shrink.

Moreover, the average salary hikes of Indian employees have remained in single digits since 2022. According to Aon India, salaries across sectors are projected to rise by an average 9.5 per cent in 2025, up from the actual hike of 9.3 per cent in 2024.

“While increased contribution towards provident funds could increase the long-term savings of employees, there could be a short-term hit on consumption,” said Manoranjan Sharma, chief economist at Infomerics.

According to D K Pant, chief economist, India Ratings, the impact on take-home salaries and consumption will depend on the percentage of reduction. The details regarding these aspects will give us a clearer picture on this”.