Until the informal economy is back on its feet, we can’t call a recovery.
With very little of the country now under a lockdown and the daily corona-case-count falling steadily, business activity is looking up. Pent-up demand is getting satiated, whether it is for phones, cars, or even homes. The ports are handling a lot more traffic, and the trains are ferrying more goods. But let us not get carried away; much of this performance comes off a very low base. Growth had all but collapsed to 4.2% in FY20, even in FY19 it was just above 6%. More cars may have been sold this Diwali, but last Diwali wasn’t exactly a blast; market leaders like Maruti had a tough time in 2019 ahead of the BS-IV phase-out reporting declines in wholesale volumes for almost half the year.
Again retail sales of two-wheelers continue to be less than ordinary, and as MD of Bajaj Auto, Rajiv Bajaj, has been pointing out, demand is subdued; one estimate by Nomura says they may have fallen y-o-y in December and, worse, the inventory levels may have gone up to around six weeks. Retail sales of passenger vehicles too could show a contraction in December. The registrations for cars, goods carriers and two-wheelers were down in the first twenty days of December compared with the daily average in November. These are hardly indications of a sound recovery.
Take commercial vehicles, often considered a proxy for the economy: the December wholesale despatches are estimated to have risen some 20-25%. That is excellent, but remember the industry has been battered beyond shape, this is the first double-digit growth in two years. Also, it is the LCVs, rather the heavy trucks, which are selling; at Ashok Leyland for instance, there was a 2% y-o-y decline in M&HCV segment in December.
It can’t be a real recovery if the core index has contracted nine months in a row to November, and the November fall was the biggest in three months. Again, while the daily average E-Way bills recovered after a fall in November, cement production fell 7.1% in November after an increase in October. The expansion in the services PMI was slower in November than in October.
The fact is that private consumption—which accounts for a large chunk of GDP—can’t pick up unless households are confident their jobs and incomes are secure, and until there are many more new jobs created on the back of fresh investments. There is no sign of this. Private capex is not picking up, as data from CMIE shows. The value of new investments in the December quarter was Rs 0.7 lakh crore, which is a shade better than the June and September quarters, but minuscule compared with the Rs 4.1 lakh crore reported in December 2019 quarter. Infra projects will be slow to take off given most players are rated below AA and will find it hard to access bank loans. Again, after the not-so-good experience of the past few years, no private player is likely to want to participate in PPPs. While the state governments—which initiate the bulk of the investments within the government sector—can use multilateral aid to fund projects, so far the investments haven’t been meaningful. According to CMIE, the government sector announced Rs 0.1 lakh crore worth of projects, compared with Rs 2.9 lakh crore in December 2019. That is not encouraging.
Also, loan growth is running at a pitiful 5-6% y-o-y, despite some Rs 5 lakh crore of surplus liquidity sloshing around and interest rates at their lowest levels in years—not symptomatic of a recovering economy; had it not been for the government-sponsored MSME scheme, the pace would have been even slower. While demand is low, banks are very risk-averse because borrowers aren’t creditworthy enough and aren’t likely to be for some time. In fact, the noise about the money being raised in the corporate bond markets again is misleading because it is only the AAA companies that are able to raise money.
That, in fact, is the story of the Indian economy right now. A small fraction of it—large conglomerates and corporations—is doing well, to some extent gaining from the formalisation of the economy. The rest of the economy—the informal sector—is languishing. Nowhere is this more evident than in the MGNREGA data; the demand continues to outstrip supply and demand is the highest in five months. The labour participation rate has eased to 40.3% in early January from 40.9% in December, and the unemployment level estimated by CMIE is close to 10%. As Pranjul Bhandari, chief economist HSBC India, has pointed out, the low level of fiscal spending could leave behind problems, such as rising inequality. Bhandari observes that while it is true that in India too there was a focus on safeguarding the vulnerable—poorer households and small businesses—there were some misses, such as the urban poor being left out, and a small overall outlay. She also draws attention to the rise in inequality between large and small firms, which is likely to be felt by individual employees and argues large firms benefited, in part, at the cost of smaller, informal firms. Until the informal economy is back on its feet, we can’t call a recovery.