Moneycontrol Pro Weekender | Hope floats consumers’ boats – Moneycontrol

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Dear Reader,
The June quarter corporate results season has seen very strong growth in profits among listed non-financial companies. The performance of 3,034 non-financial firms from the CMIE database shows their net profits were up an eye-popping 31.6 percent from a year ago. That of manufacturing firms was up an extraordinary 47.1 percent. True, there was a base effect—profit growth was sluggish in the June 2022 quarter—but even so, the corporate sector did very well in the June 2023 quarter. The State of the Economy report in the RBI Bulletin said “profitability is boosting equity valuations of all listed corporates”.
The reason was a sharp fall in operating expenses as a percentage of net sales. For non-financial firms, it fell from 88.2 percent in the March quarter to 83.4 percent in the June 2023 quarter. Lower commodity prices helped reduce expenses.
But here’s the rub: net sales of these 3,034 non-financial firms fell by 1.98 percent from a year ago. Sure, there are differences between sectors—net sales of manufacturing firms contracted while those of services companies went up a bit—but even services firms’ sales growth was very low.
Could it be that consumption demand is not very strong? One yardstick of consumer perceptions is the RBI’s consumer confidence survey. The July 2023 survey results show that the Current Situations Index, which measures the current level of consumer confidence, is at 88.1, deep in pessimistic territory (a reading below 100 indicates pessimism while one above 100 denotes optimism). But a lookback at history shows that this Current Situations Index has remained below 100 not only since the pandemic, but in every RBI survey since June 2017, except in March 2019.
That raises a lot of intriguing questions: Could all those stories of consumption being dented by demonetisation and the imposition of GST be true? Is it an indication of the K-shaped economy, with the rich doing well but distress near the bottom of the pyramid? Is there a structural problem with consumption growth in India?
One reason for the dismal state of consumer confidence could be the employment situation. The survey shows that the net response (the percentage saying their employment prospects have brightened minus the percentage saying they have worsened) has remained negative since December 2016, except for one survey in March 2019.
However, this despondence is not seen in the RBI’s surveys of business and industry. In fact, the Business Assessment Index for the manufacturing industry shows consistent optimism since 2000 except for a few quarters when things got really hairy, such as during the Global Financial Crisis or during the depths of the pandemic. Similarly, the net responses for services sector firms have been positive except for a few months during the pandemic.
How is it that businesses are positive when consumers are negative? The answer may lie in the UBS Global Wealth Report which shows that the top 20 percent of the Indian population own 83.8 percent of the nation’s wealth. To be sure, this is wealth and not income, but it’s an indication that incomes too are extremely skewed and much of the consumption is restricted to the top end. Why else does the government deem it necessary to supply 5 kgs of free foodgrains every month to 81.3 crore people in the country?
In 2005 and 2006, during the height of the hyper-globalisation boom, Citigroup brought out two controversial reports on the US being a plutonomy—an economy in which most of the wealth is owned by the rich. What matters for the economy is their consumption. Could India now be a plutonomy, in which it is the consumption of the top 20 percent that matters? Some economists have argued that for consumption to grow strongly, it’s imperative to spread the benefits of growth.
In the immediate future, the headwinds to growth may be increasing. Exports are declining. We had pointed out the jaw-dropping numbers from the Index of Industrial Production. We said high food inflation could extract a toll on consumption and growth. Our Monsoon Watch column says inflation will pinch our pockets. Global edible oil prices are flashing a red signal for India.
The State of the Economy report sums it up: “The shadow of El Nino looms over the second half of the year and the outcome for food inflation in the rabi season. Yet another upside risk is the outlook on crude oil prices that is marred by ‘engineered’ supply shortfalls.  There is a diminishing probability of crude price pressures easing over the rest of the year. This bodes ill for net energy importers like India.” Our columnist Ananya Roy analysed the implications for the markets.
There is, though, one bright spot in the RBI consumer confidence surveys. As the accompanying chart shows, the Future Expectations Index, which gauges consumer sentiments for the year ahead, has been uniformly optimistic over the years, with readings above 100 except for the worst months of the pandemic. It’s as if the consumer looks at his current state and is reminded of Oscar Wilde’s famous line: “We are all in the gutter, but some of us are looking at the stars.” It’s as if, in the midst of demonetisation, the Indian consumer said, “What’s a bit of sacrifice now to make things better later.” When growth fell off a cliff in 2019, he said blithely, “Not to worry, things can only get better.” And in the throes of the pandemic, he said, “This is bound to be the final wave and it’ll be back to normal soon.”
It is this rock-solid belief in a brighter future that shines through in the consumer and industrial surveys. As Lord Keynes said in his ‘General Theory of Employment, Interest and Money’, “if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die;— though fears of loss may have a basis no more reasonable than hopes of profit had before.” As long as the animal spirits of Indian entrepreneurs are strong, investment demand will pick up, supporting growth.
Manas Chakravarty
Dismal present bright future
Here are some of the other stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:
LIC, HeroMotoCorp, Apollo Hospital, Campus Activewear, Avalon vs Elin – Which EMS stock looks promising, Pidilite, KEC International, ITC, Concor, Crompton Greaves Consumer Electricals, Global Health (Medanta), 360 One Wealth: a uniquely positioned proxy for markets, EaseMyTrip, Relaxo Footwears, Navneet Education, Engineers India, Sona BLW, The jeweller that is our weekly tactical pick, V-Guard
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