India Inc to see mild recovery but miles to go˘

India Inc is expected to have staged a fairly good recovery in the September quarter after profits plunged 83% year-on-year in Q1FY21, a quarter in which India’s GDP contracted 23.5% y-o-y. The numbers must be viewed against the high base of Q2FY20 when corporate tax rates were cut.

Activity data suggest the economy is on the mend and that the recovery is somewhat faster than anticipated.
Auto sales, railway freight and manufacturing PMI all reflected an uptick in activity in September after a slower pick-up in July and August. Exports rebounded in September, rising 5.3% y-o-y reversing the negative 12.7% y-o-y slide in August; analysts said exports were back at close to 98% of normal levels. However, subdued domestic demand left core imports weak.

Business activity was better in August than in July though the sequential pace of the improvement slowed slightly across the board and there was a drop in the industrial sector. Nonetheless, Nomura’s India Business Resumption Index (NIBRI) rose to a new post-lockdown high of 82.3 for the week ending September 20. Economists at the brokerage observed the mobility-driven surge in the NIBRI suggested lockdown fatigue was causing consumers to disregard pandemic concerns. They estimate GDP would have contracted by 10.4% y-o-y in Q2FY21.

Retailing, capital goods,consumer durables, real estate and healthcare would have been the worst hit while IT services electric utilities, consumer staples and pharmaceuticals would have fared relatively well. While a section of the bigger and stronger companies would likely have bounced back, many others would have struggled to stay afloat. CRISIL’s credit ratio (upgrades to downgrades) for H1FY21 at 0.54 is the lowest in more than a decade. The agency pointed out that the credit ratio was cushioned to some extent by regulatory support and that corporate credit profiles remain vulnerable even as demand claws back amid a raging Covid-19 pandemic.

The rural economy appears to be relatively more robust than the urban economy thanks to the higher allocations for employment guarantee schemes, larger fiscal spends, a reasonably good rabi harvest and a spike in waged until May. Agricultural wages rose 5.1% y-o-y in May vs approximately 4.0% in March, while non-agricultural rural wages grew sharply by 8.3% compared with 4.0% (April data unavailable due to lockdown). Real rural wages (agri and non-agri consolidated) continued to contract, although improving to -1.5% y-o-y vs -4.6% in March.

Whether wages increased or fell post May isn’t clear but it’s possible they have plateaued since migrant workers have been returning to their pace of work. Experts point out a good part of the demand momentum stems from pent-up purchases and that much of this could peter out post the festive season or by end-December. Also much of the revival is understood to have taken place in the formal sector with some purchases having even shifted to it from the informal sector; this is because smaller enterprises and units in the informal sector have been unable to resume operations post the lockdown.