India's economic recovery, a glass half full?

                                                 — Charles Dickens, A Tale of Two Cities.

Politicians have been in a hurry to declare that India’s economy has recovered from the aftershocks of the covid-19 pandemic and is gradually getting back on track. “I’m happy to see recovery; at this stage we want to have very positive signs from all segments," Union finance minister Nirmala Sitharaman told the Hindustan Times in an interview in September. This projection of confidence stems from the political need to declare victory quickly and also feed into the general feel good that manages to establish itself every year, as the festival season peaks with Diwali. Feeding this narrative is a lot of economic data that does suggest an economic revival. But is a sustained revival around the corner? Or is it just a part of the economy—the very rich—who are doing well?

First, let’s look at all the data that suggests a revival.

As per a press release put out by the ministry of finance on 24 September, the gross taxes collected by the central government during this financial year stood at ₹6.46 trillion, which was around 16.8% more than the same period in 2019. Or take the case of goods exports, which went up 24.3% to $197.9 billion from April to September compared to the same period in 2019. Further, domestic tractor sales have gone up by 23% to 440,832 units from April to September, in comparison to the same period in 2019.

The stock market has also rallied big time over the last 19 months. This has made investors feel richer and in turn the wealth effect is setting in, few experts believe. Keki Mistry, the vice-chairman and chief executive officer of the home loan lender HDFC, told The Economic Times that people are feeling richer and more confident because their investment in the stock market has grown and “therefore [they] are looking to improve the quality of their life by looking to buy a bigger or better house".

One example of the wealth effect in real estate is Godrej Properties selling 340 homes worth ₹575 crore in a project based in Noida, Uttar Pradesh, in late September. Also, with more people getting vaccinated, the economy has opened up. Hence, people have more opportunities to go out and spend money. This means retail businesses are likely to do well.

A recent research note by ICICI Securities stated: “Our channel checks suggest apparel brands/retail companies are likely to see (greater than) 80% pre-covid revenue recovery during Q2FY22 (July to September 2021) with (the) easing of various lockdown-related restrictions."

A research note by Emkay Global Financial Services said that air-conditioner sales during July-September may grow 20% in comparison to 2020. Washing machines and refrigerators sales are expected to grow in the range of 2-5%. Another research note by the same brokerage stated that credit card spends could be up 59% during July-September 2021 compared to last year.

Other than data driven indicators, there is plenty of anecdotal evidence going around. Airports are full as people take to business and leisure travelling again. Hotels in tourist locations outside the bigger cities are packed.

All this suggests that the economy is going to have a cracker of a Diwali. But let’s heed what the British economist, Joan Robinson, once famously said: “The frustrating thing about India is that whatever you can say rightly about India, the opposite is also true".

The opposite story

While some sections of the economy are doing well, there’s also data that shows that large sections of the population aren’t doing as well.

For most Indian households looking to move up the economic hierarchy and become a part of what is broadly termed as middle class, a two-wheeler is one of the most expensive things that they can buy. Take a look at the accompanying chart which plots the two-wheeler sales between April and September over the last 10 years.

The two-wheeler sales between April and September this year were at around 6.52 million units. This was lower than the two-wheeler sales during the same period in 2011, a decade back, at 6.55 million units. In fact, two-wheeler sales this year have been the lowest in the past 10 years, except in 2020.

If there is one chart that tells us that India still has a major consumption problem, this is it. Two-wheeler sales being lower than where they were 10 years back are a very good indication of the fact that many households aren’t really confident about their economic future.

When it comes to home loans, the aggregate story is a little better. In the 12 months ending August 2021, the total outstanding home loans of banks grew by ₹1.24 trillion, more than in the 12-month period ending August 2020, when the outstanding home loans of banks had grown by ₹1.12 trillion. But the number is lower than the increase in outstanding home loans in the 12-month period ending August 2019—the increase was ₹1.98 trillion. As of August 2018, the increase stood at ₹1.37 trillion. Clearly, things on the real estate front aren’t as hunky dory.

In fact, things get interesting, when we divide home loans into priority and non-priority home loans. The definition of priority-sector home loans is regularly revised by the Reserve Bank of India. Currently, they are home loans of up to ₹35 lakh in metropolitan centres with populations of 1 million plus. In non-metropolitan areas, they are home loans of up to ₹28 lakh. This is subject to the condition that the home being bought should be priced up to ₹45 lakh and ₹30 lakh, respectively, in metropolitan and non-metropolitan areas.

The total priority outstanding home loans of banks as of August 2021 had stood at ₹4.71 trillion. A year back, in August 2020, this stood at ₹4.73 trillion. This means that in the past one year, banks have largely funded non-priority sector home loans. This is a clear indicator of the fact that only the rich can afford to buy homes.

Further, as of August 2021, the outstanding loans of banks against gold jewellery have gone up by a whopping 66% to ₹62,926 crore compared to August 2020. Between August 2019 and August 2021, these loans have gone up by 137%. What does this tell us? Borrowing against gold is the last thing Indians resort to, after all options have run out.

In fact, this stress can also be seen in the huge newspaper notices being put out by gold loan companies announcing the sale of jewellery against which loans have been taken and defaulted on.

The informal story

All the data cited above is from the formal sector. But a large part of the Indian economy is informal. While, there is no regular data available on the informal sector—precisely why it is referred to as ‘informal’—there are inferences that can be made by studying some data.

Take the case of the work demanded under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) from July to September 2021. It was almost similar to the work demanded between July and September 2020. In fact, the work demanded this year has been significantly more than the work demanded during the same period in 2019.

One inference is that many who worked in the informal economy in the cities and had reverse migrated to their rural homes when the pandemic spread, haven’t returned. Hence, they are demanding work under the scheme. This could mean that the businesses that they were working for have either cut down their operating size or have simply shut down.

Take the case of the restaurant business. A recent survey by the National Restaurant Association of India stated that around 25% of the restaurants across India may have shut down permanently during the last financial year. Around 230,000 jobs may have been impacted. Those working for these restaurants in the cities may have returned to their villages and have no incentive in coming back.

There are several other surveys that have concluded that small businesses and businesses in the informal sector are scaling down, shutting down or looking for a buyer. This means fewer jobs in the informal sector.

In fact, we can draw this conclusion from another data set. As per the Centre for Monitoring Indian Economy (CMIE), the labour participation rate—the size of India’s labour force as a proportion of the population aged 15 years or above—stood at 37.88% in urban India in September this year. It was 40.48% in February 2020, before the start of the pandemic. When it comes to rural India it was at 42.08% in September and 43.67% in February 2020.

What does this mean? A falling labour participation rate tells us that many individuals have stopped looking for a job and have simply dropped out of the labour force after not having been able to find one. Hence, there are fewer jobs going around in urban India and rural India, in turn leading to more work demand under the job guarantee scheme.

The fact that there is pressure on rural incomes can also be gauged from Hindustan Unilever Ltd’s comments post its September-quarter results.

Sanjiv Mehta, chairman and managing director of the company, mentioned: “FMCG [fast moving consumer goods] market growth, which picked up after the second wave, saw some moderation in August and September. Rural markets, which have shown good resilience thus far...have slowed in the last couple of months."

A market of the rich

The question is what explains this dichotomy? Why are the data points diverging? The explanation lies in something that economist Rathin Roy has been talking about. As he had explained in a May 2019 column in Business Standard, economic growth has been driven by “catering to the demands of the top hundred million". This is precisely what is happening now as well and is visible in the improved performance of economic indicators such as sales of air-conditioners, tractor sales, upmarket housing and collection of a higher amount of tax by the government.

Neelkanth Mishra, co-head of Asia Pacific (APAC) strategy and India strategist for Credit Suisse and also a member of the Prime Minister’s Economic Advisory Council, made a similar point in a recent column in The Times of India.

He said that the rich are spending. This he deemed to be important because “spending of the top 10% of India’s households equal[s] spending by the bottom half".

A lot of this consumption is delayed consumption and stems from the fact that the rich have gained monetarily since the pandemic started. Their savings have grown as they have worked from home. The stock markets rally has helped. Nonetheless, the delayed consumption will eventually peter out.

Also, this consumption can only drive economic growth in the short-term simply because for sustained long-term growth, the economy needs investment which can create jobs. Data from the CMIE points out that the new investments announced in terms of value fell by 54.9% between July and September compared to the same period in 2020. This isn’t good news. It was down 55% from July to September 2019.

Nonetheless, Crisil Research appears optimistic. It expects the aggregate industrial capital expenditure to rise by 30% between 2021-22 and 2023-24 compared to 2017-18 and 2019-20. Will that happen? Your guess is as good as mine.

Vivek Kaul is the author of Bad Money.