Economy remains in the ICU for now; there is some recovery but revenues won’t really grow till FY23

There seems to be much jubilation about the recovery, both in the economy and corporate India. No doubt the rebound has been impressive; electricity, railway freight, E-Way bills and GST collections are all doing better, and companies have displayed remarkable resilience, with some reporting stellar performances. But then, every country has its Asian Paints, the L&Ts, HDFC Banks, the Infosys-es and TCS-es, a handful of companies that will do well whatever the situation.

The headline jump in profits may seem impressive, but the optimism needs to be tempered because the quality of earnings is not great. Much of the profits come not from a robust rise in revenues as one would want but from deep cost cuts. For a sample of 1,337 companies (excluding banks and financials) sales have fallen by about 8% y-o-y; a fair bit of these revenues—including those of IT players—has come from pent-up demand. The fact is businesses have benefited from benign commodity prices and savings on raw materials, discounts, advertising, staff and overheads; total expenditure is down a sharp 16% y-o-y. For hundreds of companies, profits have been hard to come by since key sectors—automobiles, aviation, retail, capital goods, telecom, hospitality, commodities—remain under pressure. It is worrying that sales of two-wheelers and passenger vehicles fell by 27% and 9%, respectively, in October, even if the timing of the festive season is different. It is worse that sales of CVs and three-wheelers dipped by a sharper 30% and 65%, respectively.

The economy is expected to create `185 lakh crore of value-add in FY21, and there are millions whose jobs have not been impacted by the pandemic; that’s what the spends are reflecting. But, there are many more millions whose livelihoods have been disrupted by the pandemic. Demand needs to sustain post-January and into FY22 for revenues to grow. Right now, it is hard to imagine revenues growing on a sustained basis before FY23, even if a vaccine is available by mid-2021.

The near absence of private sector investment is a big challenge. New project announcements have been falling in H1 for the past five years save H1FY19; in H1FY21, they fell sharply by 69% y-o-y, to Rs 1.5 lakh crore thanks to an 81% decline in government projects and a 45% fall in private sector projects. With the private sector over-leveraged and public debt at an elevated 70% of GDP, there is little room to make big investments. ICRA reckons that most states will be short of funds this year and, therefore, capital spends could see a sizeable aggregate cut of Rs 2.5-2.7 lakh crore for a clutch of 12 states. Typically, states account for at least 50% of the country’s capex.

That means fewer jobs. CARE reports that the increase in headcount, for 1,703 companies, slowed to just 2% in FY20, at 6.54 million, from 4.1% in FY19. These numbers are somewhat understated since they do not include outsourced labour, but the trend is worrying. Also, the incremental headcount came down sharply from 2,55,176 in FY19 to 1,25,542 in FY20, with only banking and IT making additions. Again, the finance sector added only half the number of people in FY20 that it did the previous year. With increasing automation and digitisation, these additions could shrink in the coming years.

In the absence of serious labour reforms and policy sanctity and reliability, it is hard to see too many investors, foreign or local, committing capital. Real interest rates may be low, but most businesses are unwilling to risk capital. Regulation must be fair and reliable if private capex is to make a strong comeback. And, while the services sector accounts for more than half the economy, and can create thousands of jobs, this too requires some investments. Without enterprises surviving, growing and proliferating, there is no way consumption can get a boost.

Again, for banks to regain confidence and to start lending, the IBC must be restored. Despite deposits flooding banks, loan growth remains at its lowest levels in decades, at 5-6%, with virtually no increase in credit to industry. And, while borrowings in the bond markets may be up, only the best companies are able to access this money. We need to rejuvenate and revive small and medium businesses. As RBI points out, there is the risk of “stress intensifying among households and corporations that has been delayed but not mitigated”, which could spill over into the financial sector. Unless borrowers regain the confidence to leverage themselves and until banks become less risk-averse, it is hard to see the economy growing at a sustained 6-7%. Given the severity of the lockdown, it is no doubt a relief the economy is back to near pre-Covid levels. But GDP grew at only 3.2% y-o-y in Q4FY20 (with just one week of lockdown) and an embarrassing 4.2% in FY20 with capacity utilisation barely at 70%. It is small consolation that the economy will contract by just 8.9% in FY21 and not 9.6%, or that the economy will grow by 8.6% in FY22 and not by 8.1%, because the base is so low. We need to raise the bar.