India's K-shaped recovery

by Mahesh Vyas

The Indian economy has been recovering from the Covid-19-induced lockdown better than most expectations. Year-on-year real GDP contraction in the second quarter was much lower at 7.5 per cent compared to the 23.9 per cent in the first quarter. While the better-than-expected recovery is real, it is enigmatic. What drove such a dramatic recovery? It was clearly not driven by any government spending or initiative to spur growth. Neither was it driven by any increased investments by the private sector.

While the government announced several schemes, its spending during April-November 2020 was 4.7 per cent higher than it was in the same months of 2019. This is the lowest year-on-year growth in central government spending in the past five years. In real terms, central government spending contracted during this period. Net fixed assets of listed companies grew y-o-y by 5.9 per cent as of September 2020. This again, is negative in real terms and the lowest since 2016.

If it is not the government and if it is not business enterprises then it can only be households that scripted the recovery. That makes the puzzle of the rapid recovery of the Indian economy even more perplexing. We know that the recovery is largely by profits and not by wages. And those profits were not invested into fresh capacities that could have created jobs and growth in wages. How then, can households be the driver of the recovery process? This is possible only if households are considered not as a homogeneous block but are divided into the rich and the rest.

The rich have not seen an erosion in incomes partly because capital incomes such as interest and dividends that accrue mostly to the rich were quite protected and, capital itself was doing exceptionally well such as on the stock markets. Further, it has become increasingly clear that at least in India, increased mobility does not lead to increased infections. Forced savings by the rich during the initial lockdown period and a much reduced fear of infections explain the contribution of households to the revival of the Indian economy.

What could sustain this unexpected recovery process? Increased government spending cannot be relied upon. The government surprised by not spending when it was needed the most, which was in the very early stages of the lockdown, when households were pained the most. Much is being made of an uptick in government spending in November. But, this is inadequate evidence of the government planning to splurge to revive the economy. The corporate sector has no business reason to expand capacity.

Can then, the rich households continue to sustain this strange recovery process. Or, can the recovery spread to rest of the households as well. The apparent sustenance of the recovery process beyond the festival season implies that the recovery dynamics are beyond pent-up demand and festive demand. Factors that would determine the sustenance of the recovery process are a mix of the spread of employment, increase in household income levels and also positive perceptions regarding personal and economy-wide recovery process. These factors are summarised as consumer sentiments.

The index of consumer sentiments summarises household views on change in household income, change in perceptions regarding intentions to buy non-essentials or, durables, change in perceptions regarding personal income in the future and performance of the economy in the future. This index, with a base of 100 in September-December 2015 hovered in the 90s and rose above 100 only fleetingly till 2018. In 2019 it averaged at 106 and remained around there till the lockdown brought it down to 45.7 in April 2020. The index averaged less than 43 during May, June and July 2020. A small recovery in the index began in August. The quarter ended September 2020 ended with the index at 45.2. Then, in the quarter of December 2020, the index scaled up to 52.7.

This recovery in the index of consumer sentiments split by income groups graphically reflects India’s weird K-shaped recovery post the lockdown. We consider five income groups: those who earn less than Rs.100 thousand in a year, those who earn between 100 and 200 thousand rupees in a year, those who earn between 200 and 500 thousand rupees a year, between 500,000 and a million rupees and those who earn more than a million rupees in a year.

The K-shaped recovery was most evident in the quarter ended September 2020. In June 2020, the ICS for all the five income groups was in a very narrow band of 38 to 42. By September 2020 the difference widened from 4 to 22 points. The index for the poorest fell to 31 and that for the richest rose to 53.

Diversities have narrowed since then. Households of the lowest income group have recovered and the richest income groups pared some of their gains by December 2020. During this quarter, the gains have been in the two middle-income households that earn between 200 and 500 thousand rupees per annum and those that earn between 500 thousand and a million a year. It is unclear how sentiments improved in the middle-income groups. But, their recovery is impressive. It is worth keeping a watch on this group because it holds the key to the recovery process.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
6.8 0.0
Consumer Sentiments Index
Base September-December 2015
55.7 +0.3
Consumer Expectations Index
Base September-December 2015
57.7 0.0
Current Economic Conditions Index
Base September-December 2015
52.5 +0.9
Quarterly CapEx Aggregates
(Rs.trillion) Mar 20 Jun 20 Sep 20 Dec 20
New projects 3.83 0.91 1.33 0.93
Completed projects 1.73 0.26 0.72 0.69
Stalled projects 0.73 0.11 0.08 0.30
Revived projects 0.42 0.68 0.29 0.11
Implementation stalled projects 10.22 0.09 0.07 0.12
Updated on: 07 Mar 2021 8:28PM
Quarterly Financials of Listed Companies
(% change) Mar 20 Jun 20 Sep 20 Dec 20
All listed Companies
 Income -5.0 -27.6 -6.3 1.5
 Expenses -1.8 -27.9 -10.3 -0.1
 Net profit -51.1 -40.3 47.2 58.8
 PAT margin (%) 2.2 5.3 8.4 8.6
 Count of Cos. 4,376 4,373 4,372 4,323
Non-financial Companies
 Income -9.0 -37.4 -10.5 0.0
 Expenses -4.8 -37.7 -14.2 -1.0
 Net profit -52.2 -56.0 31.5 55.7
 PAT margin (%) 3.1 4.5 8.1 9.0
 Net fixed assets 13.5 5.8
 Current assets 2.5 0.7
 Current liabilities 5.4 -2.8
 Borrowings 15.8 8.1
 Reserves & surplus 1.7 4.4
 Count of Cos. 3,257 3,255 3,254 3,223
Numbers are net of P&E
Updated on: 07 Mar 2021 8:28PM
Annual Financials of All Companies
(% change) FY18 FY19 FY20
All Companies
 Income 8.5 13.4 0.0
 Expenses 9.9 13.8 0.1
 Net profit -40.6 15.8 -10.5
 PAT margin (%) 1.9 2.2 3.7
 Assets 10.9 9.6 9.3
 Net worth 7.3 8.4 4.7
 RONW (%) 3.3 3.9 5.4
 Count of Cos. 30,466 29,959 11,603
Non-financial Companies
 Income 8.6 14.1 -2.9
 Expenses 8.8 14.3 -2.3
 Net profit -10.3 21.3 -22.4
 PAT margin (%) 2.7 3.0 3.6
 Net fixed assets 7.2 5.5 12.0
 Net worth 5.9 8.0 1.7
 RONW (%) 5.5 6.5 6.4
 Debt / Equity (times) 1.0 1.0 0.9
 Interest cover (times) 2.1 2.3 2.4
 Net working capital cycle (days) 79 72 61
 Count of Cos. 24,480 24,021 8,388
Numbers are net of P&E
Updated on: 05 Mar 2021 8:23AM