While sales of two-wheelers and passenger vehicles have picked up in June and July, the improvements come off a low base; apart from tractors no segment of the auto space is really doing well.
The improvement in several high frequency indicators notwithstanding, the slow recovery of the services sector is worrying. Given this is the biggest piece of the economy, and that it provides the maximum opportunities for employment, any continued sluggishness in services could drag down growth. Indeed, Fitch has pared its household spending growth estimate for 2021 to 8.9%, from 9.1%, citing the tepid pace of vaccinations. It expects consumer spending to get back to pre-pandemic levels only in 2022. While sales of two-wheelers and passenger vehicles have picked up in June and July, the improvements come off a low base; apart from tractors no segment of the auto space is really doing well.
Unemployment, while off its peaks, is still high. Again, there has been a slight recovery in both urban and rural spends but unless many more job opportunities are created and wages increase consumption spends will falter post the festive season. Certain sectors such as IT, BFSI and e-commerce are no doubt hiring in big numbers but the recruitment is restricted to certain segments. In general, employee costs for the corporate sector increased by just about 2.5% in the June quarter over the March quarter.
Indeed, while analysts expect strong earnings growth for FY21-23 of around 25%, the bulk of the increase is coming from commodities, financials, industrials and power. To be sure, there has been a good pick up in E-Way bills and GST collections have been robust, but analysts at Edelweiss, for instance, believe the consumption-facing sector is unlikely to see any strong revival in demand. Private consumption accounts for about 55% of GDP and grew at just 2.7% y-o-y in Q4FY21 despite the help from a weak base. The bright spot has been exports which have fared exceedingly well on the back of a good global recovery.