5 min read.Updated: 17 Jun 2021, 01:54 PM ISTVivek Kaul
The central bank's latest monthly state of the economy report says this happened primarily because localized lockdowns hit consumer demand
The Reserve Bank of India (RBI) has estimated that the loss in economic output caused by the second wave of the covid-19 pandemic will be around ₹2 trillion.
The central bank's latest monthly state of the economy report says this happened primarily because localized lockdowns hit consumer demand. Also, the second wave spread to smaller cities and villages, impacting rural demand, something which hadn’t happened during the first wave.
Having said that, the RBI remains largely optimistic of the future of the Indian economy. It even quotes late British prime minister Winston Churchill to make its point. As Churchill said: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty."
Nevertheless, the optimism of RBI is tempered with some pessimism as well. As the central bank points out: “Life- and work-style transformation such as increased remote work and online shopping may likely endure. When patterns of demand shift, some firms may face closure. Some industries may become permanently smaller."
In fact, this is already happening with many small shops and micro, small and medium enterprises (MSMEs). A recent Business Standard report said nearly 10,000 small mobile handset retail stores in India have closed down during the past one year. This is around 8% of the total 120,000 stores that were there earlier.
This is on account of localized lockdowns leading to a loss of regular business for these small shops, which has been captured by big e-commerce companies. This is how a free market works. When an opportunity presents itself, those who are in a position to capture that opportunity, try and do so.
As David Boaz writes in The Libertarian Mind: “The point of economic activity is consumption. We produce in order that we may consume. We sell in order to buy." But what’s good for the consumer comes at a cost and the cost in this case is being borne by the smaller mobile phone shops going out of business.
Surveys suggest that many MSMEs across the country are in trouble. A survey carried out by LocalCircles points out: “Only 22% startups and MSMEs have more than three months' runway; 41% are out of funds or have less than 1 month of funds left, and 49% plan to reduce employee compensation and benefits costs by July."
This is hardly surprising given that lockdowns have been in place on and off for more than a year now. Unlike bigger companies, MSMEs do not have the kind of capital that is needed to survive without doing regular business.
Also, over the last one year, the bigger companies have renegotiated their contracts with their suppliers and contractors, and the MSMEs have had to bear the brunt of this.
As economist Mahesh Vyas pointed out in a piece published on the Centre for Monitoring Indian Economy website on 12 June: “Listed companies continue to make record profits."
In fact, financial results of 1,481 listed companies for the January-March 2021 period were available by 12 June. This is around a third of the companies which declare results every quarter. Nevertheless, they account for 97% of sales of all listed companies.
“These 1,481 companies collectively made a net profit of Rs.1.8 trillion which is nearly 15% higher than the record profits of the previous quarter," wrote Vyas.
In the process, the big have become bigger and the small have been destroyed. In fact, a Google search on MSMEs shows that they are in trouble all across the country and some have been asking local governments for help.
It is worth remembering here that a bulk of new jobs in any economy are created in the process of smaller businesses growing bigger. This caters to the so-called demographic dividend, as the youth enter the workforce and find jobs. When they earn money and spend it, it creates more demand, leading to more job creation.
Other than the MSMEs, the phenomenon of people working from home has also had a negative impact on economic activity. (For a detailed take, click here). Let’s try and understand this in the context of taxi drivers, particularly those who drive app cabs, like Uber and Ola.
In order to make money, these drivers need to keep driving. They can’t work from home. People who travel back and forth from their offices in cities form a major chunk of their business, something which has disappeared in the last 15 months.
As Scott Galloway writes in Post Corona: From Crisis to Opportunity: “Uber rents space in other people’s cars, driven by non-employees (in the eyes of the law, anyway). The second an Uber car stops making the company a profit, it effectively disappears and costs the company nearly nothing. Revenue can go to zero in a crisis, and Uber can take its cost down 60–80%."
The trouble is that the same logic doesn’t apply to their so-called 'driver partners'. As Galloway points out: “Uber’s “driver partners" still have to make their car payments and insurance premiums. The model is akin to United Airlines telling… its flight crews to bring their own 747 if they want to get a paycheck. But it’s a model that works. For Uber." The same is true for Ola as well.
The point is, the working lives of many of us have changed in the post-corona world. And this comes with an economic cost attached to it, something which isn’t being talked about enough. While opportunities are being created, lives are being destroyed as well.
The RBI remains optimistic nonetheless: “At the same time, existing firms in industries experiencing increased demand may expand and new ones will emerge. What matters is that resources are put to their best use and that reallocation occurs smoothly and with as few costs as possible."
This is an argument that has always worked well in theory. The question is whether it works in practice as well. One look at the investment to gross domestic product (GDP) ratio of India tells us that it hasn’t been working for more than a decade. It peaked at 35.81% in 2007-08 and has been largely falling since then, and reached a two-decade low of 27.09% in 2020-21.
The point being that many businesses which are shut down, never open again. At the same time, there isn’t enough new economic activity (investment) happening to replace them.
Vivek Kaul is the author of Bad Money.
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