Why Modi Govt Must Reorient Economy To A Mass Consumption Market

If companies don’t hire/produce/invest, those making raw material, inputs, etc will earn less. Here’s what it means.

I once had a friend who was a very nice guy, but had a face that could shatter many a mirror. Yet, he only wanted to marry a beauty queen. His friends and family tried to reason with him, but he refused to budge from his resolute search for a pulchritudinous partner. As predicted by his well-wishers, he has ended up in his late-40s as a balding bachelor. All because he didn’t lower his expectations.

The exact opposite has happened to Zee Entertainment Ltd (ZEEL) in the first quarter of this fiscal. Its profits plunged 94 percent compared to 2019, but on the same day, its stock price jumped 13 percent. That's because investors had already lowered their expectations about what the company could have earned during the lockdown. The consensus view about ZEEL’s revenues was that it would go down by over 50 percent, but it actually dropped just 35 percent. So, even though ZEEL had one of its worst ever quarters, it still beat what Dalal Street had expected.

This is broadly the story of all of corporate India.

Corporate India Has Shown That It Can Deal With Lockdowns Pretty Well

Out of the 48 Nifty-50 companies that have declared their Q1 earnings numbers, 33 have beaten what analysts expected. And, by the way, the net income of these companies is down over 40 percent since 2019.

This is over and above a terrible March quarter as well, which means things were already bad even before the lockdown began.

If one looks at CMIE’s compilation of corporate results, then the aggregate earnings of 4,120 listed companies in the last quarter of 2019-20, fell by 46 percent compared to the previous year. That prompted all brokerages to cut their earnings estimates – which were already adjusted for the lockdown – even further. CLSA, one top brokerage, reduced its quarterly estimates for Nifty companies for the 22nd consecutive quarter.

In fact, if anything, corporate India has shown that it can deal with lockdowns pretty well. They knew their sales will take a huge hit, so they cut their costs even more than that. CMIE’s compilation for 1,786 listed companies, which have declared their Q1 results, shows that revenue dropped by 25 percent, but expenses were reduced by over 26 percent.

Usually, the one cost that rises the most is the wage-bill. Employees face inflation and their cost of living goes up.

Employers have to offset at least a part of that by giving raises. CMIE’s Mahesh Vyas analysed the wage-bill of 1,560 listed companies in Q1. It went up by less than 3 percent, which is the lowest increase in 18 years. Yes, that’s the lowest it has gone up since 2002. And remember, most companies give raises and bonuses in this quarter, between April to June.

But even this small hike hides the fact that in most sectors the wage-bill went down, instead of rising.

• If one looks at CMIE’s compilation of corporate results, then the aggregate earnings of 4,120 listed companies in the last quarter of 2019-20, fell by 46 percent compared to the previous year.
• If anything, corporate India has shown that it can deal with lockdowns pretty well. They knew their sales will take a huge hit, so they cut their costs even more than that.
• CMIE’s compilation for 1,786 listed companies, which have declared their Q1 results, shows that revenue dropped by 25 percent, but expenses were reduced by over 26 percent.
• The wage-bill of listed companies shrunk in every other sector. The worst hit was the tourism industry, where expenses on wages dropped by 30 percent.

Why The Significant Drop In Wage-Bills?

If you take out banking, brokerages and telecom companies – all of which did reasonably well during the lockdown – the wage-bill of listed companies shrunk in every other sector.

The worst hit was the tourism industry, where expenses on wages dropped by 30 percent.

Textiles saw a 29 percent drop, leather was down by over 22 percent, auto-ancillaries down 21 percent, automobile companies saw a 19 percent drop in their wages, road & transport companies cut their wage-expenses by 28 percent as did education businesses. The real estate sector saw a wage-bill decline of 21 percent, which is almost the same as the cuts in the hotels and restaurants sector.

Of course, a large part of this drop in wage-bill is because contract-work would have stopped completely during the lockdown along with significant downsizing in affected industries. But wage cuts have also affected regular salaried employees, since listed companies account for the bulk of non-sarkari salaried jobs.

In fact, as far as the salaried middle-class goes, things have only become worse after the June quarter.

CMIE’s jobs-data shows that the net drop in salaried jobs increased in July compared to April, when the lockdown began. In any case, it is well-known that India’s economy was already hurtling downhill well before COVID-19. The coronavirus only accelerated the slide.

‘Corporate Anorexia Will Amplify Demand Problems In Economy’

Corporates began to cut flab and tighten their belts in 2019, and now they have gone on a crash diet. Top honchos like NR Narayan Murthy, and Kumaramangalam Birla have already warned that 2020-21 will be the worst year ever for India’s economy, and the contraction could continue next fiscal as well. So, corporates are unlikely to hire more or invest more anytime in the near future.

But this corporate anorexia is going to amplify the demand problems in the economy.

If companies don’t hire, produce or invest, those who make machines, raw materials, inputs and sell their labour will earn less and less.

That means they will spend less. This in turn, will reduce the demand for goods and services being produced in the economy.

Increased & Well-Planned Govt Spending Needed To Break Vicious Cycle

This is a vicious cycle, which can only be broken by increased and well-planned government spending. Infrastructure investments need to expand, where the government will invest and corporates will execute, with limited risk on their books. This will help sustain demand for coal, cement and steel. It will boost transport. It will create employment at all levels – managers, engineers, workers and daily-wagers. Public spending has to increase in agriculture, to improve farm incomes, so that the poorest Indians aren’t just dependent on government handouts.

Along with this, the middle-class needs to be given tax-breaks, so that they have more money in their hands to spend and save.

It requires more governance and more government, and some sort of return to centralised planning for allocating funds and resources. The Modi government can also take this opportunity to reorient India’s economy to a mass-consumption market, instead of one that caters to the top 10 percent. Sadly, till now, we have seen no signs that this government intends to intervene decisively in the economy. So, we all need to lower our expectations about our personal economic future.

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets@AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)