After one of the longest and the most severe Covid-related lockdowns, how is the reopening of the Indian economy faring so far? And what is the news from India Inc so far telling us about its health and that of the economy?
Well, if the lockdown was nationwide, the reopening has been not just phased, but local, state and even district specific in some cases. A lot has been left to the state governments to manage the Covid health crisis as well as the reopening of the economy. But because the number of Covid cases in India has been surging day after day, the reopening has been far from smooth. And some cities and states are particularly badly affected, with not enough hospital beds to treat the patients and apparently not enough doctors and medical staff either to cope with the epidemic.
Of course, the reopening itself has been patchy. From what one reads in the newspapers and sees on TV consumers are still not stepping out to shop the way they used to. Shops and malls are hesitant to reopen as well, with low footfalls, not enough sales, and the high costs of reopening their establishments, especially the rents, which had been negotiated down with landlords during the lockdown, according to media reports. In other words, consumers and shop owners are not yet fully confident that it’s safe to go back to business.
Sales through e-commerce channels, though, have been brisk, albeit with some hiccups during the early phase of the lockdown when delivery staff were stopped by police, thanks to unclear directions and operating procedures from above. However, this is where the wide gulf between small and large businesses comes into play, especially in a country like India. Small businesses run out of shops, sheds and workshops in towns and cities and they can’t really rely on e-commerce for customers. These are also the kinds of businesses that can’t work from home, but where staff need to be physically present in their premises to conduct business.
In fact, even in large companies, much of the staff need to be at work in order to perform their tasks, be they factory workers, procurement and sales staff, or any other department that requires to be physically present in order to conduct business. It is only some of the management personnel that have the luxury of working from home and even they know that they will be performing at sub-optimum levels. In fact, the Covid pandemic has brought into focus various kinds of differences within the business world. Between service businesses that require people to step out of their homes, such as dining, hospitality, travel and airlines and those that can serve their customers at home. Between businesses that deal in essential goods and those that are discretionary purchases. Between small and large businesses, not just in how and where they operate from, but in their ability to access bank credit and retain employees as well as serve customers.
With all the levels of complexity, and the fact that India is still largely an informal economy with around 90% of the employment too in the unorganized sector, what is the state of the Indian economy, especially industry, after Covid? Or perhaps, one should say during Covid, because it is still with us and is raging at a rapid speed from large cities to smaller towns.
Besides the anecdotal data that news provides us about shops and establishments still not reopened fully for business, we have the economic data and corporate earnings to go by. If we start with the news on unemployment, it was dismal during April and May, with only a slight improvement in June. Remember, unlike in many Western economies, the unemployed in India, even in times of recession, do not receive unemployment benefits of any kind and there is no government support for furloughed workers either. This time, because of the Covid pandemic, the government has had to step in and offer special loans and financial assistance to businesses in order to help them keep their people employed.
Unemployment had soared to 27% in March, according to CMIE (Centre for Monitoring Indian Economy) after which it has been on a steady downward trend which is heartening to see. The latest unemployment figure according to CMIE is 8.4%, while the figure before Covid hovered at around 7.4%, which is still at a high level.
Core sector growth (which measures eight core industries such as oil, steel, cement, fertilisers, etc) contracted less in May 2020 at -23.4% than in the previous month when it contracted -37%. The IIP (Index of Industrial production) for May 2020 showed a contraction of -34.7%, which was slightly better than the revised -57.6% for April 2020, and was only to be expected with a complete lockdown in place during these months. Manufacturing showed the sharpest contraction of -39.3%, even as consumer non-durables showed the least contraction of -11.7%. I think these are again in line with what one should expect, given that consumer non-durables (mostly essentials) tend to be more resilient during economic downturns.
Consumer price inflation, on the other hand, rose rather sharply to 7.22% in April 2020 on account of supply shortages during the lockdown before easing to 6.27% in May 2020 and further lower in June 2020 to 6.09%. What all this tells us is that the economy is on the mend slowly, but it will be many months and even quarters before we even get back to pre-Covid levels of economic growth. Which, let us also remember, was not great at a measly 4% GDP, and with weak consumer demand that has been plaguing the Indian economy for a long time.
How are businesses coping with the Covid economy? As I said earlier, businesses, especially the smaller ones, depend on access to credit and in times of a sudden collapse in production as well as demand, they struggle to keep their workers in their jobs. The Indian government had committed to providing loans to small businesses during Covid to the tune of Rs 3 trillion, along with guaranteeing credit of up to Rs. 50,000 crores. It is good to know that around Rs. 1.2 trillion of these Emergency Credit Line Guarantee Scheme loans have been disbursed till July 15, 2020. But five months into a pandemic, it also suggests that these loans are not being availed of to their full capacity, with only half the amount available being disbursed. To me, this suggests problems with lending and it is quite likely that banks are wary of lending to small businesses.
On the other hand, large companies are able to raise money quite easily, even during a pandemic. Thanks to all the liquidity pumped in by the RBI as well as central banks across the world, the stock markets have been rallying like there was no crisis. Bond markets, even more so. In just Q1 FY21, several large companies in India have managed to raise money in the equity markets to the tune of Rs.1,12,000 crores, half of which was raised by Reliance Industries in a Rs. 53,124 crore rights issue. This, when compared with Rs.1.53,000 crores that companies raised in all of FY 20, tells us that not only is there a lot of liquidity and money to be invested right now, but that the right, well-performing large companies don’t have a problem with raising funds.
In fact, thanks to the corporate tax breaks that this government gave companies in this year’s budget, most of them have managed to retire their debt and clean up their balance sheets. India’s largest company by market capitalisation, Reliance Industries, proudly announces that it is debt-free! What about new investments and expansion plans? Ah, that’s a different question, altogether. That depends on consumer demand which has been weak for three years and more, and the rural economy which has been under severe distress and whose problems have still not been addressed.
On new investments, the news has been full of only Reliance Jio and how it has been attracting billions of dollars from foreign investors, including from Facebook. That started a flood of more overseas investors flocking to Reliance Jio, which has big plans for e-commerce, 5-G networks, content, and more. This, when the rest of the Indian telecom industry is in shambles, with other telecom companies being asked to pay up huge dues and incurring massive losses. There is a need to revisit India’s telecom policy, afresh, as this simply cannot continue.
The corporate earnings season has just begun in India and it is off to a rather slow start, with just a handful of companies having reported earnings so far, and all in India’s fabled tech sector. The earnings of India’s big five tech companies, TCS, Infosys, Wipro, HCL Technologies and Tech Mahindra have managed to withstand the effect of Covid rather well, with all except Infosys and Tech Mahindra, reporting a fall in revenue and HCL reporting a rather handsome profit. However, the overall management commentary from them seems to be that all sectors are facing headwinds, but that digitization is growing. One would have thought that with Covid, the shift toward digital technologies would have gathered pace and perhaps we are yet to see that pan out over the rest of the year. The weaker Indian rupee also should help Indian tech giants.
Next, Indian banks start reporting their corporate earnings soon and all eyes will be on the dreaded bad loans or NPAs (non-performing assets) that has plagued India’s banking sector for several years. More importantly, banks’ earnings will be severely impacted by the increased provisioning that they have been asked to provide for, due to the Covid pandemic. The rates of bad loans too are set to rise, which will impact lending in the future. As it is the lowering of interest rates by the RBI will affect banks’ earnings and many public sector banks have already started announcing cuts in term deposit rates.
The automotive sector has been in the doldrums for a couple of years now and while it is a combination of factors that is responsible for the weak demand, I believe the government should have reduced GST rates for cars to 18%, while keeping it at 28% for luxury cars. The reopening of the economy has seen a small spurt in demand, thanks to a preference for private transport during Covid, and one only hopes the trend continues. That said, I believe that the time is ripe for a transition to shared and electric mobility as I have written in a previous blog post and India needs to start planning for it.
We need to wait for the rest of the corporate earnings and for India’s Q1 GDP to see how India Inc is faring during Covid-19. Meanwhile, I think the country needs to put together a comprehensive and competitive industry policy, by focusing on where our long-term competitive advantage lies and what the future looks like. I think we have a competitive advantage in the knowledge industries of information technology and pharma. We need to build on those to take us to the next level and examine what the needs of our country are. The Economist reports of the danger of obsolescence facing the Indian tech industry which, if real, is a sign that the tech giants need to up their game on AI, as that is where China and the US lead the world. We clearly need to step up our efforts in the education and healthcare areas as always, as well as infrastructure. We could add to our tech and pharma strengths by also focusing on mobility as a service. It is the next big thing in the world of transportation and offers huge environmental benefits. Besides, it is an essential part of smart cities and if we wish to decongest and clean our cities’ air, electric and shared mobility is the future.
Right now, however, nothing is more important than getting Covid under control, which has crossed one million cases in India. While the economy limps back to normal, we need to flatten the Covid curve. We need to find a better way than repeated lockdowns which clearly aren’t helping.