After the elections, in June the new government will have to focus on Budget and think well beyond the first 100-day plan with specific measures to spur employment, revive rural demand, confront concerns on redistribution of incomes, address industry concerns around archaic labour laws and more.
The heat is on. Braving the sweltering Indian summer, voters in India have started casting ballots unfolding the world’s biggest election process. From television channels beaming live coverage of the election rallies to talk shows discussing democracy, electoral autocracy, religion, truth, post-truth politics and jobs over several cups of Joe, there is no shortage of heated discussion material.
However, for our busy and curious readers, it may be worth the candle to gather insights on the economy and the road ahead. We did so by listening to experts on the much discussed and debated job scenario:
Here we try to look at the other aspects of the economy that could materially impact the proverbial ‘man’ on the street (the use of feminine gender, sounding rather inappropriate, has been deliberately avoided).
Beyond the first 100 days
After the elections, in June the new government will have to focus on the Union budget and think well beyond the first 100-day plans. Speaking to economists, industry leaders and some senior government officials – present and past, some not wanting to be named, it is apparent that there are some serious concerns – both domestic and global – needing appropriate plans and combat strategies for there cannot really be any simple or nice-sounding nostrum that can help. Despite India being in the spotlight as the fastest growing major economy on the planet, growing at more than twice the world growth rate, concerns and challenges remain. These relate to worries around sluggish growth in job creation, needing specific measures to spur employment, ways to revive rural demand, address concerns on redistribution of incomes (a recent Goldman Sachs report looks at the rise of the affluent population in the country expecting it to touch 100 million by 2027 with 60 million today earning an annual $ 10,000 per person). It will also have to address industry concerns around archaic labour laws, inflation remains a worry and economists often talk of a lag effect on prices post elections because of the increase in money flow that tends to happen during elections. Clarity on approach to self-reliance and the extent to which it could mean getting to be a closed economy, is also a concern for some.
A booming stock market may sound good but genuine investors seem to be harbouring worries on the extent to which company earnings will be able to keep pace with the valuations. Finally, the geo-political risks in a volatile world with threats of war in some regions, possible impact on trade routes and the uncertainty resulting from many countries going to the polls, including the US and the UK.
Mixed picture
Dr C Rangarajan, Economist and the Former Governor of the RBI, says, “The fact that GDP has been growing continuously at 7 per cent for three years indicates that the ‘demand pull’ factor for investment is present.” But then, to him, it is still a mixed picture: “According to the data on the Index of Industrial Production between April and February, the growth rate of capital goods was 13.4 per cent in 2022-23 and 6.2 per cent in 2023-24. For infrastructure / construction goods, the growth rates were 8.5 per cent and 10.0 per cent. Thus, it is a mixed picture,” he says.
FMCG & volume growth
We also spoke to Naushad Forbes, co-chairman, Forbes Marshall and the former president of the Confederation of Indian Industry (CII) but in the current context what may also matter is that he is the author of a popular book “The Struggle and the promise: Restoring India’s Potential. He says: “There is a big caution that one must add which is that the FMCG companies have been reporting a very low volume growth for much of the last year. Down to low single digits of 4 to 6 per cent. And when volume growth is low then they do not need much more capacity. So, we really need to see the revival in the FMCG growth that is much more substantive than what can result from rise in product prices.” At the moment, he says, they are entering into new categories and expanding operations in a few states but it is still not broad-based volume growth that will be needed.
Urban versus rural
Agrees C K Ranganathan the Founder Chairman of CavinKare, a leading FMCG company. He says “today the growth rate in the FMCG sector is not in sync with the GDP numbers and the growth is lesser than the GDP growth rate while a normally healthy situation is one where the FMCG growth rate is higher than the GDP growth. That too, this growth for the FMCG sector is largely driven by the demand in the urban markets because the rural markets have hardly picked up. We at Cavinkare are also able to feel it as our rural demand has remained low.” Calling it a stress in rural demand, he says, “it can be attributed to rise in food prices and general inflation.” But there is hope. As Dr Rangarajan says, “the weather forecast is that the monsoon in the current year will be above normal. That is good news. Rural income must rise and therefore rural consumption demand must pick up.”
More productive labour
On employment, he says, while the FMCG sector is adding jobs, the pace is down and one of the important contributing factors for this is the trends towards higher automation and digitisation. This has meant better labour productivity reducing the need for more hands.
Forbes sees this linked to growth in employment. He says, “what was driving a lot of FMCG growth in the first decade – between 2003 and 2012, to be precise, was the first time consumers. We need that where you have hundreds of millions of people who want to be first time consumers of these FMCG products, which in turn is linked to their wellbeing and their own growth prospects.” But then, for that, he says, we need employment and it would also trigger FMCG volume growth and that in turn will again drive the need for capex.
Dr Rangarajan sees a “need to explore the possibilities of expanding relatively more labour intensive activities such as food processing industries. We need to have a mix of sectors that will enable the economy to take care of the problem of employment. It is going to be a difficult task.”
Income shift
What about the pattern of recovery? Is it K-shaped with the top-end doing better and thriving while those at the bottom-end struggling. To Naushad Forbes whatever bounce back was to happen has happened and the fact remains that the firms that have come out of the recovery strongly are the bigger and more successful firms with better market positions – the top layer of the cake, if you will (all good size companies with good market positioning) is today in better shape than it was four years ago. But, he says, if you take the informal sector and informal services sector, there is a recovery but it is back to where it was in 2020, which means it has recovered but is not in a better shape. So, in that sense, you have four years of lost performance for those informal service providers. The indicator for this is again the employment data on informal service employment, which is not growing rapidly.”
Dealing with the 3Ds
In times that are getting to be defined by the 3Ds – digitisation, decarbonisation and deglobalisation, is India getting more closed today? Because, some argue that India needs to diversify the supply chain away from China and for that will need to be more open but are forces of protectionism inevitable? “We seem to be trying to become closed but fortunately, the reactions have been such that there has been a push-back. For example, when restrictions were placed on the import of personal computers and laptops in August last year, it triggered a strong reaction leading to a suspension of those measures and now we hear about high imports of laptops from China. Between 2017 and 2022, we did get more closed with a rise in the number of items where import tariffs were increased.” However, he finds that “in the last two years, with a few exceptions relating to some of the PLI items, we have not got more closed and I do hope this continues.”
Earnings & valuations
One of the concerns a leading PE investor, who did not wish to be named, had was around the ability of the corporate earnings to keep up with valuations so that there is no asset bubble creation triggering the need for a correction. This concern is also driven by the fact, he says, by the domestic and foreign capital flowing into the market. The retail participation in the equity market has been steadily growing and in a sense also redefining their view of savings. Some estimates point to a near three-fold increase in the number of people registered to trade with the National Stock Exchange (NSE) and the mushrooming of ‘finfluencers’ dispensing financial advice. The IPO market is also back and booming. Much of this could get dampened if the earnings growth does not match up. If there are a lot of capital chasing investment opportunities, which apparently is the case with a lot of dry powder capital available, there is the danger of pricing bubbles or unrealistic valuations. Nifty mid-cap 50 PE on April 22 was 33.32 as against a long term average of 23.72. The markets have been very buoyant with mid-cap and small-cap stocks dominating with some stock touching PEs as high as 300.
Geo-politics
Today, geo-politics has emerged as a major area of concern. Crisis in the Middle East could push up oil prices to unbelievable levels. In fact, at a recent Express Adda, finance minister Nirmala Sitharaman said, if there was anything that was keeping her up at night or worrying, it was the developments external to India.
Will the semiconductors lead the way?
Finally, there is good news on manufacturing, including India getting back to manufacturing penicillin (thanks to the PLI scheme). Penicillin is a basic raw material for many antibiotics and thus far completely dependent on China. For the first time, four leading companies, including Tatas, Murugappa and Vedanta are investing huge sums to set up semiconductor plants in Gujarat and Assam. The Tata Electronics investment outlay alone is to the tune of INR 1,18,000 crores to generate nearly 50,000 direct and indirect jobs. Apple has already announced plans to increase production of iPhones from India and Google to make its Pixel phones here. Indian pharma, widely acknowledged as the pharmacy to the world, is also getting back to has also had a good growth this year with leading pharma companies posting double digit earnings growth. The outlook for agriculture also seems favourable with a good rabi wheat crop and better prospects for the kharif crops riding on the hopes for a normal south-west monsoon.
Naushad Forbes says, “we do see reasonably good project demand, both greenfield and especially brownfield projects and it is quite widely spread across industries.” The capex revival argument to him, therefore is indeed true and that it is getting broad-based and not concentrated in select areas. This may provide some comfort, as also the fact that when the global growth is around 3 per cent, the Reserve Bank of India has forecast a real GDP growth of 7 per cent in 2024-25 on top of a real GDP growth at 7.6 per cent for 2023-24, the third successive year of 7 per cent or higher growth.
Source:financialexpress.com