Peering into the recovery

Business Standard, 16 November 2020

The Indian economy is in an interesting moment, where output is below the level of a year ago, but the glass is half full with momentum in many areas. We look at a few indicators with data for the Jul-Aug-Sep quarter or monthly data for September or October. We see a wide spectrum of outcomes, from profit after tax growth for non-financial listed companies of +41% to consumer sentiment of -51%. The parts of the economy which have started coming into full operations will send demand signals into the rest of the economy, and in coming months, many of the other indicators may be expected to come back to positive values for year-on-year growth.

September October Jul-Aug-Sep
Consumer sentiment -57.76 -50.75
Government tax collections (q) -13.07
Non-POL non-precious-metals imports -12.17 -4.59
Non-finance listed firms revenue (q) -9.20
Private projects under implementation -5.50
Consumption of petroleum products -4.32 2.50
Number of employed persons -1.97 -1.73
Electricity generation (utilities) 4.77 8.88
Bank credit 5.15
Non-POL exports 6.09 1.97
Non-finance listed firms PAT (q) 41.00

Table: Eleven good measures of economic performance in 2020
(All values are year-on-year growth.)

India fared relatively well in the pandemic when it comes to sickness and death, when compared with projections which were made in February and March. It is now increasingly clear that a large swathe of the Indian population has been exposed to the virus, and has developed immunity, with relatively mild experiences of sickness or death. We do not really know why SARS-Cov-2 was relatively kind to people in India and other poor countries. What we now know with increasing confidence is that a large fraction of the Indian population has immunity, and by December we are likely to have `herd immunity' (with declining numbers of infected people) in many regions.

The table shows 11 revealing indicators with the latest values for year-on-year growth. In the case of monthly data, the values for September and October are shown, and in the case of quarterly data, the value for the July-August-September quarter are shown.

Non-financial listed companies have shown an interesting combination of -9.2% sales growth but 41% profit growth. Perhaps these firms had sharply pulled back on expenses, perhaps they had expected India's encounter with Covid-19 to be worse than what actually happened, and this has generated a surprising and highly positive result. This performance on profit will do a lot to bring back a skip in the step for the leadership of large firms. It is, however, bracing to see that the top line shrank by 9.2% nominal, which is consistent with the 13% decline in government tax collections. Bank credit growth is also negative in real terms, but this may reflect the sustained difficulties of Indian banking in the period after 2012, rather than demand for credit from firms and individuals.

Looking forward, a key question lies in the extent to which some firms are able to distill the experience of the pandemic into permanent productivity gains. Will we really go back to working in offices as before? Will we go back from a shop floor managed through a computer screen, to casual conversations on a shop floor? Once new management techniques have been perfected for the WFH environment of 2020, many firms may not return to their old ways. For many firms, production levels of a year ago are now feasible at a structurally lower expenditure profile. The firms that make greater progress on modified processes in 2020 will create intense competitive pressure upon their rivals who do not.

If this high level of profit is maintained for the October-November-December quarter, we may expect firms to start coming back to normalcy on discretionary expenses in early 2021. In this happy scenario, the stock of private projects under implementation (which has a latest value of -5.5% growth for September) could come back to positive values by March 2021.

Growth is visible in exports. The world economy is coming back and Indian exporters are getting orders. In contrast, imports growth remains in negative territory. Ordinarily, the import of raw materials in this month would have gone into exports of the next month, so export-linked imports would have fueled better performance of imports. The negative values for growth of imports suggests that this aspect is swamped by sluggishness in domestic demand, which is consistent with the picture seen in -9.2% sales growth.

There is a sense of recovery in the change from September to October in electricity generation (which went from 4.77% to 8.88%), the consumption of petroleum products (-4.32% to 2.5%) and imports (-12.17% to -4.59%). If this momentum is maintained, output in Oct-Nov-Dec will work out pretty well.

There are lead/lag relationships between profit, employment and investment. Firms tend to first achieve sustained profits, then add workers to existing production facilities to cope with the first tendrils of sales growth, and only embark on investment when sustained growth of sales is quite likely and existing production lines are fully utilised. By this reasoning, the recovery of employment comes before the recovery of investment.

The number of employed persons is about 2% down compared with a year ago. Firms are generally loath to recruit until existing employees are fully utilised (and the observed decline in jobs is biased by workers with high firm-specific capital who were not sacked, who are likely to be under-utilised at 9.2% lower sales). In addition, the productivity gains of 2020 imply that the output of 2019 can be replicated with fewer employees. We need to debate: When sales growth comes back to 0% y-o-y, how many fewer jobs will the economy have? These concerns are probably reflected in consumer sentiments. The value for September was 58% down compared with last year, and there was a small gain to 51% down in October.

It is easy to decry the 41% growth in profit when juxtaposed against the 51% decline in consumer sentiment coupled with sluggish growth in the number of employed persons. But we should see the various elements of the market economy are deeply interconnected. The only path to recovery of the economy lies in profit growth that triggers off employment growth and finally investment. The most important good news from the Jul-Aug-Sep quarter is that non-financial listed companies did well on profit.

Back up to Ajay Shah's 2020 media page
Back up to Ajay Shah's home page