It’s been a cracker of a season with pent-up demand and the formal sector gaining market share, but that can’t last
The restoration of supply chains and the return of workers to factories clearly enabled production teams to meet the festive, wedding and also pent-up demand.
It’s been a cracker of a results-season. If the headline numbers don’t seem impressive, it is due to several exceptionals and base effects. In reality, a big rebound in revenues, driven up by better volumes and price hikes, together with some even bigger cost-cutting, has resulted in strong bottom lines. The restoration of supply chains and the return of workers to factories clearly enabled production teams to meet the festive, wedding and also pent-up demand.
With infections falling and the vaccine having arrived, it is not surprising earnings estimates for both FY22 and FY23 have been bumped up. It is not only the top-rung—the Asian Paints and HDFC Banks of the world—that are expected to do well, but others too. Analysts point out that in a disrupted environment, they are gaining market share at the expense of the unorganised sector; that is evident from the robust GST collections.
Moreover, they have been able to cut costs, and while not all of it may result in a permanent saving, a fair share could. So salaries would be restored and increments re-started as the business picks up. However, at the same time, companies are attempting to make do with smaller teams and more temporary staff; of late, several manufacturing firms have rolled out VRS schemes. Even as the total wage bill of the private sector saw only a modest increase in H1FY21, net of IT and BFSI companies, it actually shrank.
Consequently, given how the unorganised sector has been hit badly, it would be imprudent to believe companies across the board are going to be able to sustain revenue growth or margins at the current pace. For one, the rising prices of commodities—especially crude oil—will start to pinch, and not everyone will be able to take price increases to pass on the higher input costs. In fact, demand for a host of consumer goods could peter out once the demand from the more affluent households has been satiated; analysts point out that lockdowns necessitated purchases of homes and also a range of goods.
While the sales of affordable homes could well retain momentum, whether this holds for more expensive residential properties remains to be seen. We can’t lose sight of the fact that a very large number of urban households—and thousands of small enterprises—have been badly impacted by the pandemic and this would affect consumption, at least in the near term. The muted sales of two-wheelers are evidence that these have become unaffordable for many after the price increases.
For consumption demand to grow meaningfully or even to hold up post FY22, we need to see large-scale investments in new ventures so that many more new jobs are created. The government is supporting the housing, infrastructure and manufacturing sectors, and the several projects and schemes should throw up employment opportunities for both blue- and white-collar workers. For the moment, though, the private sector is not expected to chip in for various reasons.
While the IT services and start-ups sectors are hiring in large numbers, and this would, no doubt, support consumption, investments are needed to build a strong consumer universe. There is no doubt the economy has made a strong and quick comeback, but to confuse this with a sustainable one would be premature.