It's recession

by Mahesh Vyas

The quarter ended December 2019 was the second consecutive quarter in which corporate India recorded a decline in sales and profits in a year-on-year comparison. Sales declined by 1.2 per cent and profit before tax by 10.8 per cent. In the September 2019 quarter, the declines were 2.8 per cent and 60.6 per cent, respectively.

The poor performance was largely in the non-finance companies that form bulk of the producing companies. Net sales of these declined by 4.6 per cent in the December 2019 quarter after having declined by 6.5 per cent in the September 2019 quarter. Profits before tax declined by 20.2 per cent and profit after tax by 21.2 per cent in the December 2019 quarter. This was the third consecutive quarter of a y-o-y fall in profits - both profits before and after tax.

Two consecutive quarters of decline in real output is what usually defines a recession. The corporate sector has just seen two consecutive quarters of decline in nominal output. If inflation is positive, then the real output growth could be even lower than what we see in the nominal fall. However, we find that non-finance companies faced a fall in both, volumes and prices in the past two quarters.

This doesn’t square with the recent increase in inflation as seen in the Consumer Price Index. But, while consumer prices have been rising, wholesale prices, which better reflect producer prices have been almost flat. In the quarter ended September 2019 the wholesale price index grew by 0.9 per cent and in the quarter of December 2019 it grew by just 1.1 per cent. In comparison, the CPI grew by 3.5 per cent and 5.8 per cent during the same quarters, respectively.

Evidently, producers are facing much lower inflation on their inputs than consumers face with what they buy.

This could lead us to conclude that the corporate sector faces low input prices and rising output prices. This should be a free ride for the corporate sector. But, this is not the case.

Much of the sales of the corporate sector is the sale of intermediate goods - like chemicals, metals, machinery and coal, crude oil and natural gas or non-fuel minerals. Similarly, wholesale trade, freight transport and software services form bulk of the services sector sales. And these too, are in the nature of intermediate deliveries.

Prices of these intermediate goods are weak as is reflected in the wholesale price index.

Thus, the non-finance corporate sector faces falling volumes and falling prices.

In the December 2019 quarter, non-finance companies saw a 4.6 per cent nominal fall in sales. This comprised of a 0.6 per cent fall in volumes a 4 per cent fall in prices. In the September 2019 quarter, these companies saw a 6.5 per cent fall in nominal sales which comprised of a 3.6 per cent fall in volumes and a 2.9 per cent fall in prices.

Two consecutive quarters of fall in prices and volumes is as close as one can get to a classic recession.

This has never happened in the history of quarterly financial statements of listed companies. Not at least in the past 15 years. The second half of 2019 was the first instance of two consecutive quarters of fall in inflation-adjusted sales growth. Real sales growth did turn negative in the quarter of March 2013 and of December 2013. But, there has been no instance of two consecutive quarters turning in negative real growth.

The current downturn in the performance of the corporate sector can be compared to the one a decade ago in the wake of the global financial crisis following the Lehman crisis in late 2008. Then, the corporate sector as a whole managed to keep real sales growth positive in all quarters. But, the manufacturing sector saw a sharp and sustained fall. Real manufacturing sales were in the red for four consecutive quarters from the quarter ended December 2008.

In 2019, the manufacturing sector has already seen declines in the three quarters that have gone by. But, the declines in 2019 are less deep than they were in 2008-09.

While the decline in the manufacturing sector in 2008-09 was triggered by a global crisis then, the decline in 2019 cannot be attributed to any external factor. In fact, it cannot be attributed to any single factor similarly. In this sense, the current slowdown is a lot more menacing. The liquidity crisis of 2008 could be addressed by infusing liquidity then. The current crisis defies a similarly straight explanation and therefore demands greater effort in finding a solution.

The 2008 crisis was limited to the manufacturing and mining sectors and was offset by robust performances by the services and utilities sectors. The current crisis is also concentrated in the mining and manufacturing sectors. But, the performance of the services and utilities sectors are too weak to offset these falls. In fact, these have also registered close to negligible growth rates. The widespread nature of the current decline besides its sustenance over two consecutive quarters qualifies it better to be classified as a recession.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
6.7 -2.4
Consumer Sentiments Index
Base September-December 2015
46.3 -0.4
Consumer Expectations Index
Base September-December 2015
48.7 -0.6
Current Economic Conditions Index
Base September-December 2015
42.5 0.0
Quarterly CapEx Aggregates
(Rs.trillion) Sep 19 Dec 19 Mar 20 Jun 20
New projects 3.25 5.55 3.91 0.68
Completed projects 0.85 1.66 1.73 0.24
Stalled projects 0.41 0.61 0.76 0.11
Revived projects 0.43 0.83 0.42 0.59
Implementation stalled projects 0.91 0.13 9.78 0.08
Updated on: 27 Sep 2020 3:28PM
Quarterly Financials of Listed Companies
(% change) Sep 19 Dec 19 Mar 20 Jun 20
All listed Companies
 Income -2.3 -1.7 -4.9 -28.1
 Expenses -3.1 -2.2 -1.8 -28.4
 Net profit -1.3 -10.8 -47.5 -41.1
 PAT margin (%) 5.3 5.1 2.4 5.3
 Count of Cos. 4,452 4,431 4,247 4,117
Non-financial Companies
 Income -6.3 -5.5 -8.9 -38.4
 Expenses -6.7 -6.4 -4.9 -38.4
 Net profit -13.8 -13.8 -48.5 -60.2
 PAT margin (%) 5.7 5.7 3.4 4.2
 Net fixed assets 10.4 12.9
 Current assets 4.9 3.0
 Current liabilities 5.0 4.8
 Borrowings 8.3 14.7
 Reserves & surplus 5.7 2.1
 Count of Cos. 3,328 3,307 3,201 3,102
Numbers are net of P&E
Updated on: 27 Sep 2020 3:28PM
Annual Financials of All Companies
(% change) FY18 FY19 FY20
All Companies
 Income 8.4 13.3 0.9
 Expenses 9.9 13.5 1.3
 Net profit -40.3 22.2 -14.4
 PAT margin (%) 2.0 2.4 5.1
 Assets 10.9 9.3 9.8
 Net worth 7.5 8.6 6.4
 RONW (%) 3.5 4.3 7.1
 Count of Cos. 27,645 26,682 3,100
Non-financial Companies
 Income 8.7 13.8 -2.7
 Expenses 8.8 14.0 -1.9
 Net profit -9.0 23.4 -21.4
 PAT margin (%) 2.7 3.2 5.7
 Net fixed assets 7.1 5.3 15.3
 Net worth 6.1 8.5 3.7
 RONW (%) 5.7 6.9 9.3
 Debt / Equity (times) 1.0 0.9 0.7
 Interest cover (times) 2.1 2.4 3.4
 Net working capital cycle (days) 77 70 52
 Count of Cos. 22,442 21,605 2,329
Numbers are net of P&E
Updated on: 27 Sep 2020 12:32PM