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The psychology of a recession has set in. Even those individuals who have jobs have seen others get laid off and want to save more for a rainy day.  (Photo: AP)
The psychology of a recession has set in. Even those individuals who have jobs have seen others get laid off and want to save more for a rainy day. (Photo: AP)

Why this Diwali will lack all sparkle

  • Businesses are betting big on festive season spending. But consumers are hardly in the frame of mind to shop
  • With the psychology of a recession setting in, the festival season between October and December is expected to be a dull one. Some sectors may buck the trend, of course

The ten-day Ganesh Chaturthi festival has just come to an end. For these 10 days, it gets louder than usual in Mumbai, with a large number of people on the roads, with loudspeakers blaring. In contrast, this year’s festival has been rather quiet. Almost all big Ganesh mandals cancelled public celebrations. The frantic dancing that accompanied the Zingaat song—the biggest Marathi hit in recent years—as well as the visarajan processions toward the sea has been largely missing.

This isn’t good news for parts of the informal sector which are dependent on the festival. That means anyone from the statue makers, contractors and labourers, who put up the massive tents for the public celebrations, to all the shopkeepers, musicians and sweet makers. The multiplier effect of the Ganesh Chaturthi festival on the economy, like every other big festival, is huge.

After Ganesh Chaturthi and Onam, there are other festivals coming up. The Indian consumer considers the festival season between Navratri and Diwali auspicious for making purchases. As a 2018 research note published by the rating agency Crisil points out: “In the last ten years, around 30% of two-wheeler sales has come in the festive months."

Over and above this, industry estimates suggest that 35-40% of sales of consumer durables—electronics products, in particular—takes place during the festival season. Businesses are hopeful that this festival season, people will come out and spend money, and they will be able to put the demons of the negative impact of pandemic lockdowns on sales behind them.

The passenger car companies are also betting on festival season sales. As the Business Standard pointed out in an early August report: “Close to 12 models of cars and sport utility vehicles (SUVs), including facelifts, are likely to hit the road this festive season." Other than automobile and consumer durables companies, everyone from fashion retailers to real estate builders are hoping for higher sales or at least talking about it.

The big question is whether this will materialise or if the Indian economy is in for a dull Durga Puja-Dussehra season and a low-key Diwali. A careful reading of the data and some forward-looking analysis suggests that the festival season between October and December 2020 will be a dull one, even though it is likely to be better than the previous two quarters (April to June 2020 and July to September 2020).

Consumption shock

In the aftermath of the spread of covid-19, consumers have been cutting down on their spending. In its recently released annual report, the Reserve Bank of India (RBI) pointed out “the shock to consumption is severe, and it will take quite some time to mend and regain the pre-covid-19 momentum." As per the recently released Gross Domestic Product (GDP) figures, private consumption expenditure was down 26.7%, by more than a fourth. Such a severe shock to the consumption economy can’t go away in a couple of months.

A major reason for this consumption cutdown lies in the loss of jobs. As per the CMIE’s Consumer Pyramids Household Survey, over 85 million people lost their jobs between March and June 2020. The third national multi-institutional survey on micro, small and medium enterprises (MSMEs) in India estimates that even at a conservative level, around 35 million jobs, close to a third of the jobs in the MSME sector, may have been lost as of the end of August.

Other than people losing jobs, there have been salary cuts as well as reduced or zero increments. Job offers have been rescinded on.

This has ensured that the psychology of a recession has set in. Even those individuals who have jobs have seen others get laid off and want to save more for a rainy day. Businesses have also lost their appetite to expand and invest. As Manasi Swami of Centre for Monitoring Indian Economy put it in a recent note, many corporates including the Tata group, Bajaj Auto, Hero MotoCorp, Maruti Suzuki, Apollo Tyres and Godrej Consumer Products have all made statements about pushing back their capital expenditure plans.

In fact, the impact of this psychology can already be seen in bank data. Both individuals and businesses are saving more. The time deposits (or fixed deposits) with banks between March 27 and August 14 jumped by a huge 6.7 trillion. In fact, last year, between March 29 and August 16, a similar period, they had increased by around 3 trillion, or around 45% of the current year.

How do things look on the lending side? Between March 27 and August 14, the total outstanding loans of banks contracted by 1.5 trillion. This means that people are prepaying old loans and not taking on new loans on the whole.

Hence, both individuals and businesses are discounting for negative possibilities when it comes to the economy. Retail loans between end March and end July have contracted by 0.9%. During the same period, the loans to industry and services contracted by 3% and 1.9%, respectively. Hence, despite what businesses say, their actions speak otherwise.

So, the country as a whole is saving more and borrowing less, which means it’s spending less. When this happens, it impacts incomes of people in general, given that one man’s spending is another man’s income. This accentuates the economic recession.

Matter of crowds

Other than the psychological aspect, there is a behavioural component at play as well. A part of spending requires people going out of their homes into what can be possibly crowded environments (at least more crowded than an average home is), something they may not be comfortable with currently.

As the RBI annual report points out: “Private consumption has lost its discretionary elements across the board, particularly transport services, hospitality, recreation and cultural activities. Behavioural restraints may prevent the normalisation of demand for these activities."

An excellent example of behavioural restraints hurting a sector is that of cinemas, which are currently closed. Many movies which were ready for release have made its way to the over the top (OTT) media platforms. But some big tentpole films like Kabir Khan’s 1983 and Rohit Shetty’s Sooryavanshi are banking on the government letting cinemas open at least before Diwali.

Diwali is big business for cinemas. Many of the year’s biggest releases open on the long Diwali weekend and tend to do brisk business. Ticket prices tend to go up during this period. If the cinemas open, will the pent-up demand take over or will behavioural restraints continue?

What will make things worse is the fact that the moratorium on loans taken from banks and non-banking financial companies came to an end on 31 August. This means that both banks and businesses will have to start repaying their loans again unless they successfully negotiate for restructuring. With a higher proportion of income going towards loan repayment, this will mean that consumer spending and business spending as well as bank lending will be negatively impacted. And all this will start to happen before the festival season starts in October.

Also, the psychology of a recession seems to be setting in at banks and they are reluctant to lend in the current environment. In fact, thanks to the covid-stress, the RBI expects the NPAs of banks to increase from 8.5% as of March 2020 to 14.7% by March 2021 under a very-severe stress scenario. Under this situation, it is natural for banks to be reluctant to lend in order to ensure their future NPAs are under control. NPAs are loans which haven’t been repaid for a period of 90 days or more.

E-commerce bets

Hence, businesses may espouse that festival season optimism will pull them through this dark phase, but there are too many things going against them currently. That said, there are a few growth spots as well. Thanks to behavioural restraints, the e-commerce sector is betting big and is expected to do well, come Dusshera and Diwali.

As The Economic Times pointed out in a recent report, executives of leading brands said the marketplaces have projected a surge of over 40% in consumer traffic during the festive season. Of course, the question is whether this will increase business as a whole or simply take away business from offline to online, with many first time online buyers.

In fact, even if companies do well around Dusshera and Diwali, they might not end up doing well during the course of the year. Fashion retailers who do big business in festival time remain sceptical. Many of them already have unsold inventories and are reducing their orders before Diwali.

To be sure, a few economic indicators are looking a lot better than they were in April and May. Take the case of domestic two-wheeler sales. In July 2020, the sales fell by just 15.2% to 1.28 million in comparison to July 2019.

So, have things improved? Not if we take into account the fact that sales in July 2019 had fallen by 16.8% to 1.51 million in comparison to July 2018. Hence, domestic two-wheeler sales in July 2020 were 31.4% lower than two-years earlier. With sales being down by nearly a third than they were two years back, how can there be an economic recovery? A similar low base effect was seen in July in case of cars as well. Over and above this, what gets attributed as vehicle sales are essentially factory dispatches to dealers of various companies. Companies are currently building up inventory at the dealer levels in the hope of sales picking up in September, after the inauspicious (for shopping) period ends. Further, building up of inventory has been necessitated by the new BS VI environmental norms.

To get a correct picture, we need to look at the Vahan data, which lists vehicle registration. As a recent story in Mint points out in this context: “Registration of new vehicles in June and July were still 50-60% below their Jan-Mar numbers." Only sales of second-hand vehicles and tractors remain strong. Pent up demand has also played a role in pushing up these sales.

In conclusion

The larger point here is that rebounds in several economic indicators are due to pent up demand or due to other nuanced reasons. In fact, as the RBI Annual Report points out: “The upticks that became visible in May and June after the lockdown was eased in several parts of the country appear to have lost strength in July and August, mainly due to reimposition or stricter imposition of lockdowns, suggesting that contraction in economic activity will likely prolong into Q2 [July to September]."

With the number of new cases growing at the rate of around 80,000 per day, covid-19 is no longer just an urban pandemic. It is well and truly making its way into semi-urban and rural India. As this happens, the rural economy which was expected to drive the overall Indian economy will also slow down. It is worth mentioning here that non-agricultural activities form close to 70% of the rural economy.

To conclude, the economic scenario during October to December 2020 will be much better than the earlier two quarters, thanks to the depressed bases of everything during the lockdown. But will that be enough for economic growth to be well and truly back, or even partly back for that matter? Not really. On the economic front, this Diwali, as the Boss, Bruce Springsteen, famously sang, we will be dancing in the dark.

Vivek Kaul is the author of Bad Money

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