Road to economic redemption: It is going to be a long haul ahead, don’t fool yourself

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October 31, 2020 6:00 AM

Just a handful of industries are seeing some revival, things remain tough for most others with little consumer demand

One very worrying aspect of the corporate results for the September quarter is the sharp cut in costs; while revenues are up only sub-3%, for an initial lot of some 173 companies, expenditure has fallen 1.5%.One very worrying aspect of the corporate results for the September quarter is the sharp cut in costs; while revenues are up only sub-3%, for an initial lot of some 173 companies, expenditure has fallen 1.5%.

There seems to be a little too much optimism surrounding the nascent recovery over the past few months. Surely an economy, coming out of a serious lockdown, and, in which, some Rs 180 lakh crore of value addition is to be created during the year would be expected to see a rebound of sorts? After all the incomes of a meaningful part of the population—government officials, employees in much of the corporate sector, businessmen, rich farmers and retired persons—have not been impacted as much by the pandemic. And, this is the festive and wedding season. So it should not be a surprise that Maruti Suzuki has sold nearly one lakh cars during the Navratras; a good part of this would be pent-up or dormant demand.

Indeed, as most economists have pointed out, it is those in the informal sectors whose livelihoods have been lost and the increasing formalisation of business activity that will make it harder for the unorganised sector to recover. Since the performance of the informal sector is not always fully captured by the GDP data, it is also hard to get an exact idea of how that part of the economy is really faring. Also, indices like Nomura’s India normalisation index shows services continue to be a laggard even as aggregate demand and supply are improving. Since most jobs today are in the services sector that cannot be good news.

So, while it is, no doubt good to see sales of cars, paints, steel and even homes go up, that is just one side of the picture. Two-wheelers aren’t selling too well as Rajiv Bajaj has told us, and that is not too expensive a product. In fact, the sharp pace at which bank deposits are increasing and the anaemic rate at which retail loans are growing tells us that consumers, right now, prefer to save rather than spend. Very few of those spending are leveraging to do so; loans for consumer durables are at a seven-month low. What bankers say about there not being too much demand for credit is probably true. The plunge in retail sales of jewellery, which is expected to see its worst quarter in 12 years, will put many out of jobs and even out of business.

One very worrying aspect of the corporate results for the September quarter is the sharp cut in costs; while revenues are up only sub-3%, for an initial lot of some 173 companies, expenditure has fallen 1.5%. And, this is not just the input costs but also spends on marketing, promotions and even employees. So while there are stellar performances—especially from the IT pack, which is a big job creator—at the aggregate level profits are being eked out reining in costs. And, remember it is the best companies that are usually early birds. Maruti Suzuki chairman RC Bhargava is spot on when he says we need to wait till January to get a better sense of where consumer demand stands. The fact is that without big-ticket investments that create more jobs consumer demand simply can’t sustain; the growth in private final consumption expenditure slumped to 2.7% y-o-y in Q4FY20 leaving the average increase for the year at about 5.3% y-o-y. That was well before the pandemic. Unemployment may have fallen since the peaks of April and May, but that is not enough to sustain the recovery.

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