There is a great deal of excitement these days around the post Lockdown rebound which was imminent as consumption, investment etc almost everything was completely shutdown for nearly 75 days. There would always be pent up demand, already committed investments, incomplete projects, pre monsoon works etc which would happen. Moreover the absolute basic of consumption items would see a faster rebound. However longer term growth prospects in India are deteriorating significantly for the near future.
India had one of the most severe forms of Lockdown which shutdown almost everything completely for a long period of time. On top of that there has been almost no Fiscal Stimulus by the government and tax increases on Fuel combined with daily price increases over the last few days have in fact created a fiscal contraction. There have been widespread job losses as well as salary cuts. The entire tourism and hospitality industry is in complete disarray. Last week I drove down from Mumbai to Chandigarh and I saw all roadside restaurants, hotels etc shut down completely. Even when they were allowed to start many few actually opened up as they were unsure of demand and most of the norms for starting up could be restrictive for many hotels. Many of the restaurants would be unviable at a 50% capacity utilization. Nearly 10 Crore people are directly or indirectly associated with this industry.
Excitement has build up around people going out to buy consumer durables, some cars and bike after the lockdown has ended. However this is just likely to be a rebound buying. Many of the auto stocks, especially two wheelers have rebounded to levels of January when there was no Covid. As such people buying those stocks today not only expect normalcy to return but there to be growth over the January levels which looks unlikely to me. There is a lot of talk of rural revival and that leading the economy. Factually the rural economy has been under stress for a long time and just one good cropping season, some additional allocations to MNREGA Is not going to create any sort of huge rural revival. Yes there will be some rebound in demand as migrants have returned to their villages and instead of consuming in the cities they will consume in their villages. Besides that any significant rebound is more hope rather than backed by facts on the ground.
Urban demand is likely to be extremely subdued due to large urban centres still being at the peak of the Covid crisis, significant job losses as well as salary cuts and a lack of new job creation. Given the state of the finances of the State and Central Government in the near term urban demand is unlikely to be supported by any initiatives of the Governments too. The social distancing norms will also reduce the capacity utilization of most shops and establishments while increasing costs. This would also reduce profitability across the board. This will also be true in manufacturing where costs could go up if social distancing norms are strictly enforced.
The components of GDP growth are consumption, agricultural growth, private investments and government expenditure. Except for agricultural growth all other components will remain subdued. Every conference call that I have attended I have seen companies saying that they are cutting down the already subdued capital expenditure by 25-75% for the next one year. Given the Fiscal Situation especially of the State Governments we will see that most new projects will be stalled and developmental projects will take a backseat over the next two years. Only the Central Government via fiscal stimulus could have spent more but they have chosen not too. The Indian government seem to have their own economic model which is contrary to anywhere else in the world. This will hit growth severely going forward. External demand via trade and services exports will also remain subdued. Monetary Stimulus can only work to some extent. We also need to remember that unlike some other economies where growth was fine prior to the Covid Crisis we were already going through a slow growth cycle for years.
The government has largely termed easier access to loans as a stimulus which will not work out as no one will take more loans to fund their normal working expenses. Moreover given the bureaucracy associated with such processes the actual pass through might be much lesser. I have written in the past as to the importance of Fiscal Stimulus to revive growth as without demand revival supply side incentives when global demand is also subdued is not going to work out well at all.
There is a popular commentary going on about “Markets are telling us something else”. Well in that case what were the markets telling us in JANUARY when Nifty was 12500 and what were they telling us in March when Nifty was 7500. Essentially markets tell us nothing they are just a measure of collective sentiments in the near term. Unprecedented stimulus globally combined with huge liquidity infusion by the US Fed, ECB as well as BOJ have created a wall of liquidity which has created an upswing in global risk assets. However factually on ground economic activity will take a long time to revive due to increased job losses, less new job creation, salary cuts, a reduced investment cycle etc. The Federal debt of the US Government has already touched nearly 125% of GDP and the US Fed has expanded its balance sheet by nearly $ 3 Trillion from $ 4 Trillion to $ 7 Trillion over the last three months.
The gap between “Main Street and Wall Street” has not been so wide since maybe 1999. The question then is when will the fact check happen. Well that could happen as quarterly results play out in July and the initial opening up lockdown gives way to facing the reality of slower growth for longer. Consumers will either not have the ability or will be wary of consuming, Corporate Expenditure will be muted for a long time given huge overcapacities, government expenditure will remain compressed at least for 18 months. The counter balance is in the form of lower interest rates which will aid growth at the margin and if inflation remains low for longer can give a greater impetus if confidence returns. The current thesis is for a strong revival after a severe GDP compression this year. However I seriously doubt this thesis. There will be revival for sure but there are various factors at work. The Covid Crisis is still very much there with both in India and Globally the number of daily cases still rising. Many countries that have opened up without adequate precautions have seen second round spikes.
In conclusion I would say that we need to fasten our belts and be ready for a rocky ride. There will be repercussions of business shutdowns, job losses, salary cuts, growing unemployment etc. Stock Markets will need to recognize this at some stage. How long they will ignore growing economic uncertainties and a reduction in longer term growth outlook is something that we need to see. The worst example of cheap money driving up markets unsustainably was seen in 1999. We are not at that stage as of now but there is excessive optimism on revival post the downturn which is not backed by analysis.