Which Way Wind Is Blowing For Economy?

India has managed to achieve a sort of fiscal feat which many other countries couldn’t do to their economies even after throwing loads of money. With virtually no fiscal support (notwithstanding the hyperbolic numbers of Rs 20tn and multiple version of Atmanirbhar Bharat etc., much of which are for optics) and with entire heavy-lifting left to the central bank, how did the Govt. manage to do what it has done? Could this be plain luck or sheer accident or fantastic foresight? We will only know later with the benefit of hindsight. With such a sharp surge in demand in the festive season, global rating agencies are in a race to upgrade their earlier downbeat forecasts. Or is it too early to celebrate, given that it could be all because of pent-up demand that could fizzle out soon. What is running in many investors mind is this. Is it just a strong bounce from the steep fall or early signs of long-term recovery? With no easy or conclusive answers yet, there is no harm in dissecting the data points to get some signs of what India macro is up to.

To assess the status on the economy, the usual and most common approach is to start by looking at the growth numbers from various sectors in the festive season and discount it for the pent-up factor. From the festive season growth perspective, everything stands out. Starting from the passenger cars to two-wheelers to tractors to durables, the common story is about demand coming back in vengeance. But if one discounts for the pent-up demand and for channel restocking, the numbers ofcourse may not look so rosy. Take for example the two-wheeler numbers. On the wholesale level, the growth for the month of Oct was in double digits on YOY basis. But at the retail level (going by registrations), the sales were down by over 25% in Oct.   Some of this gap can be explained by the fact that states like Andhra Pradesh, Telangana and Madhya Pradesh aren’t yet on the Government’s Vahan database (registration database). If one crunches the passenger car sales numbers, picture is not far different. While cars at the whole sale level grew by healthy double digits, at the registration level, it fell by over 8% for the month of Oct. 

Instead of taking the usual approach explained above, the other interesting way to assess is to look at the level of demand for loan restructuring from the most stressed informal sectors. Here we have a huge surprise in store. Commentaries from the smaller banks (like DCB, Equitas) and NBFCs that mainly cater to informal and gig economies, indicate that the demand for loan restructuring from informal sectors are very low at around 3 to 5% of the loan book, which in a way reflects improved confidence on the sustainable recovery. Similarly, data point from Emergency Credit Line Guarantee Scheme (ECLGS) is not far different from the restructuring picture. This scheme was launched with much fanfare to target disbursal of Rs 3tn as Govt. guaranteed loans to small and medium companies in the stressed sectors. To everyone’s surprise, the banks managed to disburse only 60% of the targeted amount within the stipulated deadline i.e. Oct end in spite of lower rate, longer time and moratorium benefits. This forced the Govt. to expand the scope to cover much bigger sized companies (up-to Rs 250Cr turnover companies from original Rs 100crs) and to increase the timeline to March’21. Though the Govt. packaged and peddled this as another stimulus measure as part of Atmanirbhar 3.0, it was a tacit admission that the scheme did not meet its objectives. Looking at it from a positive angle, may be, not many SMEs need a lending hand as they see demand reviving in their businesses. 

Similarly, commentary from large banks on the collection efficiency, slippages, retail credit growth etc. does point to a mending economy. This coupled with low demand for restructuring and for ECLGS as portrayed in above analysis, one gets to sense that business confidence may be slowly returning. These arguments give more weightage to the resurgence (recovery) thesis while slowing pattern in high-frequency numbers like 

power generation, e-way bill generation, freight traffic etc. in the month of Nov strengthen the argument towards rebound theory (than recovery). We will get to see the conclusive evidence on which way the wind is blowing only by Jan-Mar quarter once festive momentum subsides. Until then, it is resurgence for die-hard optimists while it is a case of pent-up rebound for cautious ones. But, here is the silver lining from Maruti’s commentary that strengthens the optimist’s case. In their guidance released in Nov, they have announced a plan to hike production target for the rest of the year as they see improved prospects even after the festive season. Let us hope that this is not a one-off case.  More importantly, with renewed focus on structural reforms amid prudent fiscal policies from the current administration (Labor codes, Farm bills, Production linked incentives etc.), there are good chances that the rebound triggered by festive demand can morph into a resurgence over time.