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The second wave’s impact on the economy was expected to be less severe because a national lockdown was not imposed, unlike in 2020. States took their own calls on where and when to impose restrictions and even the type of restrictions was not uniform. Our recent edition of the Economic Recovery Tracker did show activity levels improving, as lockdowns were lifted, but consumer sentiment has not recovered. And if consumers are not optimistic, then it’s difficult for businesses to be in good cheer.
The IHS Markit India Manufacturing Purchasing Managers Index (PMI) also shows that manufacturing sector contracted in June. The PMI reading was at 48.1 compared to 50.8 in May, with a level below 50 indicating a contraction. Companies were least optimistic in almost a year and they endured a contraction in orders, production and exports. Thus, while we can argue about the degree of severity the second wave has dealt a blow to corporate confidence, for sure.
Project investments are a useful gauge to see how companies view their future. CMIE data shows that the second wave has affected companies’ desire to invest as well. New project announcements in the June quarter came in at Rs 1.55 lakh crore, less than the Rs 1.79 lakh crore announced in the March quarter. While these are preliminary numbers and will be revised later -- usually upwards -- the trend is not encouraging. One bright spot here is the manufacturing sector is in the lead in making announcements and not the government, as one may have expected.
What could explain this reluctance on the part of companies despite a less stringent lockdown? Some of the major contributors to demand have not been spending since they were stuck indoors. This affected discretionary consumption in both products and services. After scaling up operations, companies were compelled to scale back output again. That makes life difficult for companies as there are costs involved in scaling up, such as factory startup costs, arranging for manpower, facilities management and utilities.
Companies would rather prefer a moderated level of growth but one that is maintained at a steady level. Company managements must be worried at the prospect of another wave forcing them to scale down operations. In such a situation, they would rather operate at a lower level of utilisation than go full steam ahead and hit the brakes again. In such circumstances, the desire to invest in projects will be limited to a few sectors where growth is assured. In fact, Jefferies believes that healthy profit growth expectations of large listed companies augur well for capex. Do read our take on the issue to know more.
Here are today’s investing insights from our research team:
MSTC: Growth in e-auction opportunities to steer rerating
Subros: Banking on plenty of growth drivers
JSW Energy: Growth levers in place, but valuation stretched
Monetary policy is not the solution to inequality (republished from the FT)
What else are we reading today?
Focus on profitability as IT firms set to clock best growth after COVID-1
How Indians view politics through the lens of religion
The real-time electricity market has come of age
Is it time for investors to take profits off small-cap funds?
Four Years Of GST | A look-back and the road aheadChinese Communist Party At 100 | From a revolutionary party to a ruling party to a governing partyTechnical picks: GMR Infra
, Tata Power
, Canara Bank
and Magma Fincorp