While liquidity in the banking sector may be in a big surplus, some segments of business and retail customers are not able to access affordable loans.
India Inc has just got a generous gift from the government, a hefty 10 percentage points cut in corporation taxes—from an effective 34.9% to 25.17%. For the top 1,000 companies, which account for nearly a third of the taxes paid by corporate India, this amounts to a windfall gain of Rs 37,000 crore, and a recurring one at that. Now, companies must stop cribbing for more sops and concessions, and must start investing again. Before that, they need to stimulate demand—consumer demand in particular—by sacrificing some profits and margins. So far, it has been all “where’s the stimulus!” There are few signs companies want to contribute to the economic recovery. If they simply pocket the gains now, without lowering product prices, that would be unfortunate. Maruti Suzuki, for instance, has dropped prices almost across its portfolio, but just by some Rs 5,000. True, there are other freebies accompanying this, but even on a car that costs just Rs 3 lakh, it doesn’t add up to much.
Developers, such as DLF and Sobha, are unwilling to drop prices even by a paise because, apparently, these are pretty low. “Prices are already low. If the economy gets a boost, it will help the real estate sector as well,” Rajeev Talwar, CEO, DLF said in Business Standard.
In other words, they are not going to do their bit. What they need to keep in mind is affordability has worsened to a four-year low. RBI data shows, house price-to-income ratio in India increased in the last four years, from 56.1 in the 2015 March quarter to 61.5 in the corresponding period in 2019. Not surprisingly, close to three lakh units remained unsold in the Mumbai Metropolitan Region at the end of July. According to Knight Frank, the rise in residential prices in the last four years in the top eight cities has been lower than retail inflation. Given how prices were highly inflated to begin with—due to land bought at very high costs, and speculative buying encouraged by builders—prices should not have gone up in the first place.
The scepticism runs high. While one brokerage appreciated the argument that companies should pass on, and not retain, 100% of the gross mathematical upside from this development,it also said “we believe they would (retain the upside from the stimulus)”. It added that the Indian consumer staples space was not the most competitive of sectors, and that it had generally seen companies retain windfalls elsewhere—whether in raw materials deflation phases, or the the upside from GST implementation. “We would not expect a different outcome this time,” the analysis read.
The belief is that even if a few cuts are made here and there, these would not so much as singe the profits. To assume companies will share anything more than a small portion of the benefits with the consumers or trade would fly in the face of historical evidence. “We see no reason to challenge history”, the analysis noted. That is a sad commentary on corporate India, but so far, it hasn’t prompted companies to act.
To be sure, sectors such as steel may be facing headwinds in terms of falling prices, and somewhat sluggish demand; ebitda spreads contracted 420 bp y-o-y in Q1FY20. But, despite this, the robust 7.5-8% growth in the last two fiscals is only expected to slow to 4-5%, and that’s no collapse, just a slowing.
India Inc must not retain the gains from the tax cuts, it must spend these to boost consumption. Aditya Narain at Edelweiss has pointed out how the US economy hasn’t done well post the sharp tax cuts from 35% to 21% in December, 2017. The tax cuts in the US came on the back of a strong economy, and low interest rates, but nearly two years after the event, investment momentum has decelerated, the deficit is up, and growth has slowed. Of course, any comparison between India and the US needs to be come with the necessary caveats about the market, and the economic cycle. India is not where the US was then; risk appetite is low—both on the part of companies and some lenders. Private sector capex has been decelerating for over two years now and remains muted, except for the assets purchased by the bigger business houses via the IBC route.
While liquidity in the banking sector may be in a big surplus, some segments of business and retail customers are not able to access affordable loans. Unlike in the past, this time around, the slowdown has resulted, to a great extent, from over-leveraging by companies; the situation has been aggravated by the shortfall in funds with NBFCs. But, there are some pluses. While in the US, the Fed was not accommodative, RBI has been easing, and should continue to do so.
More important, banks are lowering loan rates. It is true that corporate profits have been been falling—excluding TCS, and Reliance Industries, they fell some 15% y-on-y in the June quarter for a sample of 2,145 companies. Nonetheless, it is a chunky Rs 86,000 crore coming from an aggregate ebitda margin of 14.7%, or an annualised `3.5 lakh crore. Not small change. Now that they have got their reward, India’s industrialists need to to take on some responsibility, some risk.