#89 Uncovering The Recovery🎧

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- RSJ

Are we done with the pandemic in India? While the case counts have seen a renewed surged in a few states and there’s been partial lockdowns and travel restrictions imposed, the markets are crowded, traffic is back on the roads and industry leaders are claiming everything is back to pre-Covid levels. Like most things in India, we follow rules while simultaneously not following them. So, we have found a way to pay our respect to the virus (wearing a mask) while getting on with life (pulling the mask over our chin while dealing with others).

This is the kind of contradiction we revel in. Unsurprisingly, our economy is following suit.  

Newspaper headlines would indicate we are seeing a robust recovery. Hardly a day passes when you don’t come across an interview of a business leader who announces their business volumes are back to pre-Covid levels. The message from the economic advisors to the government and from the officials of the Finance Ministry is upbeat. Apparently, the worst is behind us and the reforms initiated during the pandemic have set the stage for growth in future.

How real and sustainable is this? Our everyday experiences don’t sit well with this narrative. A lot of us still aren’t out and about to shop or to work. Our spends on discretionary items have been low because salary cuts are still operational. Services is still on the ropes as a sector as we aren’t travelling, eating out, watching films, or going to the salons as we did in the past.

So, how’s the economic recovery really going?

It’s best to look at macroeconomic indicators instead of cherry-picking data to make sense of things. There are three perspectives that emerge reading through the macro data.

#1 Data Is Good; But Who Is It Good For?

There are multiple areas where we are doing good:

* Stock markets are at an all-time high. Since the pandemic lows in late March, the market has rallied more than 50 per cent. Over 5 million demat accounts have opened since April ‘21. For comparison, 4.9 million accounts were opened in the whole of FY 20. Mutual Funds inflows in H1 has grown by 6 per cent over last year. If the index is a consensus estimate of future prospects of listed entities, we are at peak levels of optimism.

* Listed entities made record profits in H1 of FY21 which coincided with the pandemic and large-scale demand destruction. Net profits of listed entities grew in this period by 24 per cent. To put this in context, the median profit growth in the last 60 quarters was 9 per cent. The pandemic also accelerated the oligopolistic characteristics in most sectors of the economy. The top 3 players in most sectors accounted for more than 60 per cent of profits. The rich are getting richer.

* NPCI retail transactions have grown by over 30 per cent in volumes in H1 FY21 over the previous year while they are down 15 per cent by value. Value of UPI transactions in H1 has grown by over 50 per cent. Clearly, there’s more business transacted in the formal economy during the pandemic. More importantly, low value transactions have moved to formal economy as well going by the increase in volumes. Also, Bank deposits have grown by 10 per cent during the same time while household savings are at their peak.

Who is it good for? Two conclusions are easy to draw from the data above. One, the top 4-5 per cent of the populace that participates in capital markets seem to be doing well for themselves. This segment also accounts for a significant share of consumption of high-value goods. They haven’t held themselves back during the festive season. This is seen in the September data of various sectors. Two, the growth in retail transaction volume that’s captured by NPCI and UPI suggests a significant shift from informal to formal economy. The data about the informal economy or on those outside the 4-5 per cent isn’t exactly visible at this moment.     

#2 Data Is Good; But Is It?

Then there are areas where the data suggests we are back to pre-Covid levels. All’s well now. This is tricky territory and needs to be understood better. Let’s look at a few high-frequency data indicators:

* In Sep 20, passenger vehicles volumes grew by 13 per cent while 2 wheelers volumes went up by 11 per cent over the same month last year. To put this in perspective, FY 19-20 was one of the worst years for the automotive sector. Tractors have sold really well; up by over 20 per cent in H1 over last year.

* E-way bills and railway freight traffic origination – the two metrics indicating the health of logistics sector – were up in September over last year after being down by more than 15 per cent till then.

* Net new EPF subscribers reached 1 million in August ’20. The pre-Covid levels in Jan and Feb was about 1 million. This suggests companies are back hiring.

The data above points to a robust recovery. But does it? Let’s take the data of net new EPF subscribers. Till the pandemic hit us in March, we were adding over a million new subscribers every month and growing at 15-20 per cent over previous year. Since the pandemic began, we have lost the opportunity to add about 3.5 million net new subscribers based on this run rate. How soon will we be able to make up this deficit? We will have to assume from September onwards we return to our usual growth trajectory plus we make up the lost ground with ‘real’ recovery, i.e. we have an incremental higher growth than the usual trajectory. Even if we assume this incremental growth to be about 10 per cent on y-o-y basis, it will take us between 30 – 36 months to recover the lost ground in areas where we claim to have hit pre-Covid volumes now.

The same principle will apply to any sector including passenger cars and two-wheelers that we have talked about above. Similarly, the logistics growth seems to be on the back of inventory being cleared that had piled up during the lockdown. To truly recover what we have lost will take us about 2.5 – 3 years on a best-case basis.

This is a sobering thought. The optimistic way to look at this is that we have recovered to pre-Covid levels in many of these areas sooner than we thought. That’s small solace.

#3 Data Simply Isn’t Good

There are multiple areas where the data isn’t good at all.

* Labour is under stress across the board barring the top 1-2 per cent of the working pool. The record profits seen by listed companies in H1 also come with the lowest wage increases (over the past 15 years) of less than 4 per cent y-o-y in the past two quarters. Companies have reduced their headcounts in this period and may have learnt they were carrying flab over the years.

* MGNREGA work demand has remained higher by over 50 per cent in H1 this year over last. Even in Sep ’20, the work demand was of over 24 million households was 71 per cent higher than last year. Employment provided by the scheme has also been at over 50 per cent higher. The 19 million households employed in Sep ’20 was 56 per cent higher over last year. The reverse migration of workers from the urban economy back to the agriculture sector that’s saddled with low productivity and low-income levels has undone years of movement away from it.

* CPI (retail inflation) has soared to over 7.3 per cent. This is already in the uncomfortable range. Liquidity in the system is still at all time high. The RBI will have its hands tied in cutting interest rates further to spur growth.

While the economic activity has picked up possibly faster that a lot of us expected, there’s hardly anything to be complacent about. The recovery is still fragile because we aren’t seeing the full picture yet. Sajjid Chinoy in the Business Standard made a pertinent observation:

“Operating profit growth of listed non-financial firms sizzled (+44 per cent in nominal terms) but largely on the back of firms rationalising expenditures. Recall, on the income side, GDP is simply the sum of economy-wide operating profits, pre-tax wage incomes and indirect taxes. If GDP is poised to contract in the July-September quarter, yet listed company profit growth is so strong and indirect taxes are recovering quickly, what does that tell us? That profits of smaller, unlisted firms and labour income (wages and employment) suffered sharp contractions last quarter. This, in turn, could have meaningful implications for future growth and income inequality.”

We still have a long way to go before we get back to the pre-pandemic output trajectory. A rough estimate suggests a minimum of three years on a conservative basis. Meanwhile, the informal economy and the labour are still bearing the brunt of the pandemic lockdowns. The stimulus injected by the government has been meagre so far. Most of what has been announced are relief measures or medium to long term reforms.

The annual budget is about 3 months away. It will be useful for the ministry to take a hard and realistic look at the economy and take measures that ensure we don’t lose more time. A well-timed stimulus will still go a long way.

There’s an invisible India that will continue to suffer for long otherwise.  

HomeWork

Reading and listening recommendations on public policy matters

* [Podcast] David Beckworth with Bilal Hafeez on his podcast Macro Musings. Bilal and David discuss the prospects for a K-shaped US recovery, COVID-19’s impact on the Eurozone and the UK, how the launch of the EU’s recovery fund has fared, and how the pandemic has impacted the outlook for the services sector, inflation, and the US dollar.

* [Article] Economist Ajay Shah peers into the economic recovery.

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