Low rural wages, high farm costs, elevated crude oil prices—and a spurt in Covid numbers—could all spoil the party
Thanks in part to the receding number of Covid-19 infections and the third wave of the pandemic not having shown up yet, the recovery is clearly gaining steam, though not all metrics may be displaying the same momentum. Worryingly, the services sector—contact-intensive sector, continues to lag the rest of the economy. But there is progress that can be cheered; tendering activity saw a 22% y-o-y increase in Q2FY22, driven by orders from roads, power distribution and equipment sectors taking the H1FY22 increase to 5% y-o-y. The two-year CAGR is 22% but heavily skewed in favour of roads, excluding which the growth drops sharply to 7%. Non-food credit grew 6.75% y-o-y in the fortnight to September 24, the fastest in nearly 18 months and analysts point out demand for fresh loans in Q2FY22 has re-bounded to levels last seen in Q4FY21; loan growth between March-end and now has turned marginally positive. The pick-up is reflected in the Nomura India Business Resumption Index, which rose to 105.1 for the week ending 10 October from 103.4 in the prior week and a pre-pandemic level of 100. What’s encouraging is that economists believe the rise, this time, is fairly broad-based. The early Q2 updates from the corporate sector suggest consumers are back shopping; both Avenue Supermarts and Titan, for example, have posted strong top-line numbers while real estate players Sobha, Macrotech Developers and Oberoi Realty are reporting robust sales volumes.
Nonetheless, there are some concerns. Economists at Bank of America point out the increase in rural wages has been moderating, averaging just 2.7% y-o-y in the April-July period, compared with 7.4% y-o-y in the corresponding period of 2020. The moderation has been sharper in the case of non-agri wages; the support from higher minimum wages and the bigger allocations for MGNREGA, in the earlier phase of the pandemic, has tapered off. Moreover, they have toned down their expectations for rural demand because they believe that despite a likely improvement in agri-income, higher farm costs will hurt. Farm costs (imputed from WPI) are up a steep 13.7% y-o-y between April and August, compared with an average 1.3% y-o-y increase over the prior five years. So, while the kharif output in FY22 is tipped to increase at around 0.5% y-o-y, a rate similar to that seen in FY21 of 0.8% y-o-y, some of the price-led income growth—as expected from the good wholesale prices—would be offset by higher costs.
What could also spoil the party is elevated crude oil prices that will feed into local inflation, pushing up prices of goods and services as companies pass on costs to consumers. If the power outages continue, it will hit industrial production and exacerbate the shortages of inputs, already severe thanks to the scarcity of chips. Interest rates are rising, but very slowly and are unlikely to reach levels where they would deter either companies or individuals from borrowing. The worst blow of all could come from a fresh rise in Covid cases, currently tracking about 20,000 a day, during or post the festive season. Meanwhile, CMIE data shows the unemployment rate has fallen sharply to 6.9% for September; trends put out by job-tracking agencies show companies have stepped up hiring for both blue-and-white collar workers. But it is probably prudent not to get ahead of ourselves. RBI’s rather subdued GDP growth forecast of 7.8% in FY23, on the back of 9.5% in the current year, suggests we might be missing something.