Many argue that the new dataset released by RBI—on around 2.4 lakh unlisted firms—conclusively prove the new GDP estimates are kosher. They argue that while the unlisted firms were growing faster—possibly because they had less debt than the larger listed firms—they were off everyone’s radar, so when people said GDP growth didn’t ‘feel’ like 7%, that’s only because they weren’t seeing the whole picture. A Patanjali’s stunning performance—a company off the radar till recently—vis a vis that of a Hindustan Unilever was used as an illustration of precisely this one-sided analysis. Attractive as the argument is, it doesn’t hold water.
Headline numbers may show thousands of small enterprises, across the country, growing their top lines and bottom lines at a fast clip. But while sales growth is more or less steady, profits have lost momentum: For a sample of 2.37 lakh companies, net profits—shorn of other income—rose by just 6.7% in FY15. And operating profits, while growing at 16.6%, lost a lot of pace compared to the 23% in FY14.
This is, of course, relatively better than the performance of the universe of large listed players; profits for a sample of 2,200 companies fell by 9% in FY15. To suggest, however, that the performance of these small and mid-sized companies is driving GDP and, can explain the difference between the data based on the old series and new series, is a tad too simplistic.
To begin with while the number of companies is large, the pool of profits is very small—just R28,151 crore in FY15 (net of other income). That is less than a fifth of the profits of the universe of larger companies. Had one used a bigger sample of 2,500 or 3,000 companies, the share would have been one-sixth or one-seventh, whether in terms of top line or even operating profits.
So, while a wage bill of R61,250 crore—which is what the 2.37 lakhs firms paid out in FY15—is not to be sneered at, it certainly cannot buy what R5-6 lakh crore can. If economists are tracking data from the large listed universe of companies, therefore, it is because that is where the purchasing power is. In absolute terms, the rise in the wage bill for the smaller firms was just R8,870 crore while for the larger universe, it was around R44,000 crore; this 10% growth for the larger firms, therefore, would have weighed in more on consumption demand.
Indeed, given that some part of employee remuneration is not reflected in corporate balance-sheets and that the actual salaries paid out are higher, the contribution of the larger firms to consumption spends would be even higher.
But even ignoring that, we must accept the difference in scale that the aggregate numbers throw up. While no one doubts the role of enterprises in driving up consumption, the magnitude of spending is what’s important to keep in mind; after all, one Tata Consultancy Services (TCS) alone employs some 3.5 lakh people. This difference holds for capacity creation, too: R40,000 crore of depreciation (in FY15 for 2.37 lakh companies) simply cannot build what R2.4 lakh crore can and one cannot simply ignore the six-fold difference here.
One important reason the larger companies have fared worse is because of the presence of at least a dozen commodities players, including a Reliance Industries (RIL). In FY15, the top lines of larger firms were hurt by the collapse not just in the price of crude oil but also a host of metals, especially steel. If one takes a look at the FY14 numbers—when the commodity collapse had not begun—net sales for the larger firms grew at 9.21%, matching the sales of the smaller firms which grew 9.9%. And profits also grew.
Again, the headline profit numbers for the 2.37 lakh companies are skewed by the high ‘other income’ component—in FY15, the other income was R36,785 crore. Net of this, profits were R28,151 crore. So, while this cash will contribute to the GDP in its own way, this isn’t core income. A closer look at the data suggests it is services—59% of the sample—that has driven growth and within this, it is wholesale and retail trade, the biggest chunk, that has done well. But, the momentum in the services’ top line doesn’t sustain all the way; operating profits grew at just 15% in FY15, compared with 21% in the previous year, indicating a sharp slowdown. So, it is not as though services players in the small sector are in any way bucking the trend.
Indeed, the manufacturing piece hasn’t done anything very spectacular either; going by the fact the rate of growth of employee expenses slowed in FY15 and that much of the net profits were earned from other income, it clearly slowed down. It is hard to understand how the real estate sector is growing when all large property players are finding it difficult to push sales; perhaps, what is being shown as sales is just inventory.
At the end of the day, one simply cannot ignore the data on the ground, whether it is two-wheeler sales, cement production, railway freight, home starts or exports. And none of this indicates demand is about to overtake supply any time soon. Hero MotoCorp’s sales volumes stayed virtually flat at six million units in FY16, order inflows at Larsen & Toubro are down to a trickle and Hindustan Unilever has been trimming prices to be able to hold on to market-share. At last count, there were some 6.5 lakh unsold homes across the country.
Morever, credit downgrades would not be overtaking upgrades if the economy was recovering in any meaningful manner: India’s debt-weighted credit ratio—debt of firms upgraded by CRISIL to those downgraded—has declined to 0.3x in H2FY16 from 0.4x in H1FY16, and languished at sub-1x for the past three years—signalling a stalled economic recovery. For a broad-based recovery, both the credit ratio and debt-weighted ratio should exceed 1x. Smaller firms are not very much less-leveraged; interest costs as a share of sales, at around 2.75%, were only slightly lower than that for the larger firms at 3.4%. It is wonderful to know that even in these tough times so many small firms remain afloat. But, unfortunately, the slowdown seems to be hurting them, too.