Representative Image (Source: AP)
Dear Reader,
The festive season has started. Businesses have high expectations from the season this year, hoping that it will give a much-needed boost to consumption. The season will provide answers to some pressing questions: Is the pick-up in consumption sustainable, or is the current bounce merely due to pent-up demand? Will festive consumption demand extend to the masses, belying the narrative of a K-shaped recovery? Or is the demand from the top third of the population enough to sustain overall demand in the economy? At the moment, though, all the signs point to demand getting stronger.
Consider employment. The India Composite Purchasing Managers’ Index (PMI) for August showed that private sector jobs expanded at the strongest pace in 14 years during the month. That’s in the formal sector, but the government’s Periodic Labour Force Survey (PLFS) of urban employment for April-June 2022 shows the unemployment rate for persons above 15 years of age at 7.6 percent, compared to 8.8 percent in pre-pandemic April-June 2019, suggesting more jobs have been created even in the informal sector. Even youth unemployment has come down, with the unemployment rate falling to 18.9 percent among 15-29-year-olds, compared to 21.6 percent three years ago. What’s more, the urban labour force participation rate is better than it was in pre-pandemic times.
Rural employment too is getting better, seen from the drop in demand for work under the rural employment guarantee programme, as sowing picked up. In August 2022, 1.6 crore households demanded work under MGNREGA, only a bit higher than the 1.46 crore households that demanded work under the scheme in August 2019, before the pandemic. Clearly, if employment is getting better, consumption demand too should pick up.
Sure, inflation will burn a hole in the consumer’s pocket, but then the rate of inflation is on a downward trajectory, with commodity prices easing, Brent crude falling below $90 a barrel, and global freight rates plunging. As my colleague Ravi Ananthanarayanan points out, “While it is widely known that the FMCG sector’s profitability in the second half will revive, favourable tailwinds on the input cost front could see them deliver better-than-expected results.” Our portfolio of preferred retail stocks has gained 25 percent on average since our sector note of June 2022, easily beating the Nifty return over the period. A rebound in travel has brightened the prospects of the hotels sector. Among the many stocks that could benefit from festive demand, we picked out Speciality Restaurants, Hero MotoCorp and Subros this week.
Another factor supporting consumption is increased personal borrowing. Growth in bank credit this fiscal year has been the highest in at least 10 years. RBI data show that in July 2022, growth in personal loans outstanding with banks was 18.8 percent from a year ago, vehicle loans were higher by 19.2 percent, while credit card balances outstanding were higher by a cool 28.3 percent. That should provide fuel for consumption growth.
What could pull down consumption? The quality of the jobs created has been poor, with the proportion of workers in salaried employment falling and those working as ‘unpaid helper in household enterprise’ increasing. Why unpaid helpers should be considered as employed at all is a mystery. Also remember that in the PLFS survey ‘a person was considered as unemployed in a week if he/she did not work even for 1 hour during the week but sought or was available for work at least for 1 hour during the week’. Those who worked for an hour a week may not think they have jobs, but who’s asking them?
There’s also the niggling problem of kharif sowing being lower than last year and the government’s penchant for banning agricultural exports whenever farm prices show signs of rising. Add the fact that the average wage rate for all rural occupations has been below the inflation rate for many months, and there continues to be a question mark on rural demand. Nor are gig workers’ earnings keeping pace with inflation. Our Economic Recovery Tracker shows unemployment declining, but consumer sentiments faltering.
Even if consumer demand stays robust, that may not be good enough for high growth. The global slowdown will affect every country. For example, the energy crisis in Europe may spoil the party for several sectors. We analysed the gains and pains for Indian chemical players. Industrial metal prices are back under pressure, as this FT story, free to read for Moneycontrol Pro subscribers, says. The tech slowdown has started to bite, although HCL Tech has reaffirmed its revenue guidance. RBI faces its moment of truth as the US dollar goes from strength to strength.
As for the equity market, market expert Ajay Bagga tells us that the yield curve inversion in the US need not necessarily lead to a recession. But does the promising PMI really promise a stock market rally?
If you want to enjoy a horror story this weekend, do read about the apocalyptic vision of Credit Suisse market guru Zoltan Pozsar, who wrote in one of his notes, “If the current episode of monetary tightening were a scene from a movie, we’d be looking at something similar to the scene from Apocalypse Now, where a group of helicopters is approaching a small village on the beach with Wagner’s Ride of the Valkyries beaming from the speakers.”
Manas Chakravarty
Here are some more Moneycontrol Pro stories, insights and analyses we published this week:
China’s BRI is not just a debt trap but a trade trap too
The Eastern Window: Can India gain from the UN report against human rights abuses in China?
Russia has made worrying inroads into Africa
Why the price cap on Russian oil is a joke
Inclusion in global bond indices — a reality check
Inclusion in global bond indices is a job half done
Etadapi Gamisyati — this too shall pass
Stocks analysed this week
Concor here and, after the long-term leasing policy for railway land, here
Measured by purchasing power parity, India became the third largest economy many years ago
Threat of hard landing hangs over shipping industry
Why the EPFO is right about raising the retirement age
Sebi’s circular on Algo trading a good step, but will impact the industry
Moneycontrol Pro regulars
Apart from our daily technical analyses, this week we had
GuruSpeak — from globe-trotting investment banker to full-time trader
Start-up Street — Hybrid online-offline models the way forward for start-ups
Personal Finance — Why chasing FIIs is not the right strategy for retail investors
Checkout Budget Highlights 2023
