A long road to recovery PDF Print E-mail
Monday, 23 November 2020 04:26
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Shobhana column

The labour participation rate stayed below pre-pandemic levels in the week to November 15, falling to 39.5% from 40.2% in the previous week. The demand for power also weakened somewhat, to 5.6% from a better 8.7% in the previous week. In fact, although it was the most festive time of the year, the Nomura India Business Resumption Index plateaued.

While there are a good many signs the economy is limping back to normalcy, and several sectors have seen a smart rebound, the optimism is overdone. We are not seeing too much evidence the momentum will sustain.

The key services sector continues to perform well below par, which is a big concern given it employs huge numbers. Also, the recovery in manufacturing comes off a low base and has been led by a replenishment and rebuilding of inventories that had been depleted. The September factory output of 0.2%, for instance, is below pre-Covid levels. Bank credit to industry is flat, suggesting businesses aren’t ramping up. Railway freight tonnage, after increasing 18% y-o-y in September, moderated to 11% y-o-y in October. Consumer goods are selling well but, again, primarily due to pent-up demand, channel restocking and very low competitive intensity from smaller players; much of the demand could fade away post-December.

The headline corporate numbers appear impressive. But, shorn of financials—where provisions for potential loan losses have not been made adequately pending the SC’s final orders—they are a lot less flattering. The pre-exceptional PAT for Jefferies’ universe of companies, excluding financials and telecom, actually fell 7% y-o-y in Q2FY21 with both revenues and operating profits staying flat. For a sample of 2,334 companies (ex- financials), revenues were down 8% y-o-y in Q2FY21; profits were boosted by deep cuts in expenditure of as much as 15% y-o-y, led by a fall in raw material costs that came off by 400 bps y-o-y.

We are not sure yet on how big the loan losses could be; the relatively high level of collection efficiencies could be the result of the fact that borrowers have enjoyed a six-month moratorium.

Corporate profits, therefore, may rise more slowly from here on. After all, a good part of the costs—spends on marketing, promotion and even employees—will re-emerge once operations normalise. The fact is not too many companies as yet have pricing power and, given the keen competition in most sectors, will need to pass on the cost savings to buyers if they are to retain market-share. This would be true even in the B2B space, where prices will likely be under pressure given demand, although improving, is still relatively subdued.

Also, top-tier listed companies and lenders are back on their feet and are doing relatively well and the sum of the ebitda and wages (a proxy for GVA) shows a big spike. But, if the GDP is expected to contract by about 8-9% y-o-y in Q2FY21, it means the rest of the economy—smaller businesses, unlisted firms that far outnumber listed ones and the incomes earned by employees in these spaces—are in bad shape. Apart from the loss of business due to the lockdown, smaller enterprises have been unable to recover money owed to them by bigger businesses and government departments. Until the MSME space recovers, the recovery can’t be a full-fledged one.

Urban India has clearly been affected worse than rural India; sectors such as malls, restaurants, hospitality and aviation, which employ large numbers, are in trouble. Consequently, the poor urban households too have been badly impacted. These sectors will see a recovery, but a much slower one. The informal sector was badly hit post demonetisation, but did regain much of the lost ground; this time, though, it could take much longer.

In the meantime, the cost-cutting initiatives by larger businesses will affect incomes of smaller enterprises, which, in turn, will affect jobs and incomes in those sectors. This will keep demand subdued, and some parts of the economy will remain moribund, others sluggish. While lower asset prices and stamp duties are driving up sales of residential properties, CRISIL estimates total primary sales, across the top ten cities, would nonetheless decline 40-50% in 2020-21. Again, while the festive and wedding seasons may boost sales of cars and two-wheelers, motorcycle sales are tipped to de-grow by about 15%, cars by about 10%. Auto registrations were down some15% y-o-y in October.

Again, while the rural sector seems to be in reasonably good shape, and has supported demand, the high demand for MGNREGA—which has been 50- 60% higher this year between April and October—suggests there aren’t enough employment opportunities. Data on real rural wages is somewhat dated; the rise moderated to 1.3% y-o-y in June from 1.9% y-o-y in May, but may have slowed. As Sonal Varma, chief economist at Nomura, points out, it is normal for the pace of recovery to moderate as the economy moves out of the lockdown phase, as there is progressively less scope to recover every month and pent-up demand fades. Several sectors are yet to make up the losses incurred during the lockdown. Ultimately, we need to see the jobs coming back; going by CMIE, the employment rate is still about two percentage points below pre-Covid levels, translating into 9 million fewer jobs today. Net EPFO enrolments turned positive in June but are increasing slowly. We’re a long way away from a recovery.


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