Vijay Kumar Gaba

The status of Covid19 may no longer be that of a pandemic anymore. A large majority of countries have seen significant decline in the number of active patients, after having experienced the peak of infection cases. The fatality rate has declined materially, especially due to acceleration in the vaccination drive.

However, in past few weeks, many countries in the world have seen reemergence of Covid19 cases in some clusters. Scientists are claiming that the rise in number of cases may be due to mutated variants of the Sars-CoV-2 virus. A fear has been expressed that we may soon see a third wave of the pandemic, primarily due to the emergence of new variants of Sars-CoV-2 virus, some of which might be immune to the vaccines available presently or the doses of vaccine being administered presently.

The pandemic has changed a lot of things in past one year. The lockdown and mobility restrictions have materially impacted our personal, social, and economic lives. There is a great deal of the discourse on how the businesses and societies must “prepare for a post Covid19 world”; much like we have learned to live with HIV – exercising precautions and restraint.

I strongly feel that post Covid19 world may be a realty in this decade. It may even take couple of decades to materialize. It would therefore be pragmatic to “prepare to live with Covid19”. In fact this thought has already started to gain currency. For example, Singapore government is reportedly “preparing its population to deal with Covid-19 as part of their daily lives and people will be able to work, travel and shop without quarantines and lockdowns, even with the coronavirus in their midst.” The Singapore administration believes that “With enough people vaccinated, Covid-19 will be managed like other endemic diseases such as the common flu and hand, foot and mouth disease” as the plans for Singapore to transition to a new normal are outlines.

"Finally, whether we can live with Covid-19 depends also on Singaporeans' acceptance that Covid-19 will be endemic and our collective behavior. If all of us shoulder the burden together - workers keeping their colleagues safe by staying at home when ill and employers not faulting them - our society will be so much safer," the ministers was quoted as saying.

I think, we In India also need to accept Covid19 as a long term companion, and prepare to live with it. The preparations must be done at the following five levels:

1.    Personal: Observe Covid19 protocols till 80% population is vaccinated, and herd immunity is achieved. It may take another 12-15 months. Till then continue to avoid non-essential travel and socializing; observe social distancing to the extent possible; and follow a healthy lifestyle to strengthen our internal immunity.

2.    Social: Accept Covid19 as a normal flu and not attach any stigma to it. Reimagine social and religious ceremonies and pilgrimages.

3.    Business Increase the investment in technology to reorient our business processes. The idea should be to institutionalize the decentralized working and adopt more collaborative work practices.

4.    Finances: Cut leverage at both personal and business level, maintain a decent level of liquidity, enhance financial and social security for ourselves and co-workers and build an emergency corpus for future natural disaster and pandemics.

5.         Governance: Include Covid19 in the normal budget. Provide for building, maintaining and improving healthcare infrastructure, keep running awareness campaigns, invest in vaccine research and innovation, and be ready for annual seasonal spikes in cases.

In past couple of months a number of research reports have expressed concerns over the rural demand in the wake intense second wave of pandemic and subsequent lockdown of economic activities. Some consumer facing corporates have also expressed similar sentiment in their interaction with analysts and investors. The popular views seems to be that unlike last summer, when the rural demand remained resilient despite a wider and stringent lockdown, this year the demand may not show similar resilience. Wider and deeper spread of infection this time is one of the primary reasons behind these concerns. Rising stress in household and unorganized sector is also expected the discretionary spending in check.

In this context, there are few points that need to be noted by investors before forming a negative view on consumption theme.

Record production in crop year 2020-2021

Firstly, as per the third advance estimates for the 2020-2021 crop year, the agriculture ministry has expected record foodgrain production for 5^th consecutive year. India's foodgrain production is estimated to rise 2.66 per cent to a new record of 305.43 million tonnes in the current crop year 2020-21, on better output of rice, wheat and pulses amid good monsoon rains last year.

In the non-foodgrain category, the production of oilseeds is estimated at 36.56 million tonnes in 2020-21 as against 33.21 million tonnes in the previous year. Sugarcane production is pegged at 392.79 million tonnes from 370.50 million tonnes in the previous year, while cotton output is expected to be higher at 36.49 million bales (170 kg each) from 36.07 million bales in the previous year.

Given the remunerative pricing and higher volume of crop conventionally augur well for the overall rural income.

Normal monsoon forecast for 2021

The India Meteorological Department (IMD) has forecasted a normal monsoon for 2021. As per IMD’s latest forecast, Southwest monsoon, starting in June, is expected to be normal at 98 per cent of the Long Period Average (LPA).

This week, the widely-respected Australian Bureau of Meteorology (BOM) has also ruled out the likelihood of the rain-disrupting El Nino phenomenon over the next six months. Meteorologists say that a low probability of El Nino is certainly good news for the monsoon, although the complex weather system depends on many other factors.

A good monsoon usually means another year of good bumper farm production and consequent positive impact on the rural economy and consumption demand.

Second wave weakening and economy unlocking

In past one week, the second wave of pandemic has shown a clear tendency to decline. Further improvement is expected over next couple of weeks. It is likely that the mobility restrictions may begin to ease as the Kharif sowing season approaches. It is therefore likely that the income loss and spending curbs (due to mobility restrictions, health concerns, curtailed marriage spending etc.) seen in 1QFY22 may not spill over fully to the next quarter.

Indubitably, full reopening of economy and normalization of household spending may take at least 3 to 4 more quarter, till a significant proportion of the population is inoculated. Consequently, the economic growth for FY22 earlier projected to be in the range of 11-12%, may get constricted to 7-8%. This implies that Indian economy will attain the FY20 level of economic activity only in 2F2022 only.

My personal assessment of the rural and some semi urban areas in UP, MP, Punjab, Haryana, and Chhattisgarh is as follows:

·         Household finances have been damaged across the state, especially in the lower income group families. Lower income and medical expenses have eaten up savings and overall debt level has risen (most of it informal or friendly). The expenses on education and health have risen for a common household. For 5% households these trends may be structural due to loss of life or permanent employment. Lenders (formal or informal) will have to share some burden of this in near term.

·         The consumer confidence for discretionary spending is materially lower. However, two wheeler and smart phone/tablet may not be discretionary in most cases. Clothing, jewellery, home renovation, wedding, etc are some of the discretionary items that may cut material cuts. Down-trading in staples, personal care, shoes, home appliances, personal vehicles is also clearly visible.

·         The credit worthiness of an average household has diminished. The personal loan segment has been witnessing maximum growth in past few years. A slowdown in this segment may be inevitable.

·         The demand for farm input remains robust. Farm credit disbursement however may have slowed. The worst impact is from contraction in farm credit from informal sources. How efficiently this conundrum is resolved, may have material impact on the growth of rural economy. Implementation of farm laws in letter and spirit would be critical in resolving this situation.

·         The loss of life is unfortunate in any case and under any circumstance. In rural area, the Covid fatality rate is materially more in second wave as compared to the first wave. However, given the disguised unemployment and underemployment, the economic impact may not be as severe as many analysts might be anticipating. Not more than 5% households in rural areas have borrowed money to get treated at private facility in towns.

·         Pandemic has actually resulted in upgrade of healthcare facilities in many tier2/3 towns and villages. Hopefully much of this improvement will stay post pandemic also which will be a major positive for rural economy of India.

·         In rural and semi urban areas there is resistance to vaccines. Much of this resistance is result of misleading propaganda by ignorant, mischievous and/or malevolent elements. So far the institutional effort to counter this misinformation campaign in grossly inadequate. Recover would largely depend on how fast we convince people to get vaccinated and actually vaccinate them.

Based on my assessment I would not be too worried about consumer staples beyond couple of quarters. A material correction post 1QFY22 results could actually be a good entry opportunity. I would be extremely cautious about retail lenders, especially unsecured loans, and sale of premium vehicles. Appliances sales may miss this summer season, but might see a near normal festival season post monsoon.

The present trends indicate that the Second wave of Covid19 pandemic in India may have peaked in most of the states. In the rest of the country, it is expected to peak in next 4-6 weeks. This should ease the pressure on healthcare ecosystem and bring some relief to the panicked citizens.

The government sources have indicated that India will have enough supply of Covid19 vaccines by end of 2021, and most of the population will be inoculated by the end of FY22. Various scientists have cautioned that we may see another wave of pandemic. However, the global experience so far is that any further spurts in the intensity of the pandemic may not be as devastating as the second wave due to better immunity and preparation of citizens against the virus; and improved healthcare ecosystem. This immunity could develop due to vaccination, infection in earlier waves and/or life style improvements induced by pandemic itself. The greater awareness amongst citizens and healthcare professionals may also help in containing the impact of futures spurts in the intensity of pandemic.

Notwithstanding the uncertainties and skepticism (or cynicism in many cases) witnessed in past 15 months, the thought of a victory over pandemic is definitely comforting.

However, this by no means implies that impact of first couple of waves will be fully mitigated by end of this financial year. I feel the devastation caused by pandemic will take many years, may be a decade, to mitigate. The damage caused to businesses, families, personal finances & health is overwhelming and would require mammoth effort at government, community and personal levels to heal. In particular, the rehabilitation of the impacted families may require mission level effort.

Loss of livelihood

Many families have lost their livelihood. Most of these families are from the bottom half of the pyramid who have lost jobs or their self-owned enterprises are no longer relevant. However, a significant part of these families could be from lower half of the middle class. Some families have lost their single bread earner. Some businesses have become redundant for good. Some families had to incur substantial debt for Covid19 treatment. Some families are left with members with severe disabilities or complications that will take long time and/or significant money to manage/cure.

It is pertinent to note that the pandemic has happened when the economy was already stressed for some years. Numerous smaller businesses were becoming redundant due to twin shocks of demonetization & GST. Bank credit had squeezed and margins dwindled. The larger businesses were gaining market share from them. Banks were reluctant to lend money to them. Besides, growth of ecommerce also led to consolidation of markets and hence lower margins for smaller players. Pandemic just hit the final nail for many of them.

Many street vendors, tutors, trainers, mechanics, etc have permanently lost their jobs as customers have shifted to digital platform for delivery of goods and services. Of course some smarter once have adapted digital methods for delivery, but a large number is facing redundancy for now.

Damage to psyche

The pandemic has caused psychological disorders to a large number of people. Severe illness, loss of close family member, prolonged lockdown, loss of livelihood etc are causing a variety of disorders like anxiety, depression etc., amongst children, young and old alike.

Many unprivileged children who were brought to schools with great effort are out of school again because either their parents have been displaced or cannot afford digital access. Many of these children are showing behavioral changes.

A number of health workers who have worked tirelessly for past one year are also mostly stressed and seen suffering from behavioral issues.

Cynicism and disbelief in system

The behavior of some unscrupulous elements during the pandemic has raised the level of cynicism and disbelief in system in common man. The viral news of people hoarding and black marketing lifesaving drugs, medical appliances and apparatus is broken the confidence of many hardcore nationalists. Exponential propagation of few instances of overcharging by ambulance operators and cremation priests etc has further dented the confidence of people.

The murky war of words between various politicians and their supporters on social media and mainstream media to safeguard their political turf during this extremely sensitive period is further strengthening the cynicism and disbelief.

Covid has indeed triggered a strong community bonding. Exemplary community effort is being made to help fellow citizens. Millions of volunteers and health workers working tirelessly and selflessly. Unfortunately have not received prominent coverage in media and damage has been caused to the social belief system.

Not comparable situation, but post 1984 riots similar conditions had developed for about 1500-2000 Sikh families in Delhi. It took more than two decades to bring their life to near normalization, though many scare still remain.

Given the pan India impact of the pandemic, it would definitely require a decade of mammoth mission scale effort to bring life to near normal.

For investors, discretionary consumption and financial are the sectors that need to be watched carefully.

It would be fair expect that the rehabilitation effort (a) will keep fiscal pressures high and will not let yields fall much from these levels; (b) will not let tax rates ease (could rise) anytime soon.

May 2021 Bulletin of the Reserve Bank of India, carries some useful insights about the performance of NBFCs during the pandemic. Being a critical source of consumer and MSME finance, performance of NBFCs is usually a broad indicator of the consumption demand, and consumer and business sentiments.

The key highlights of the NBFCs performance, especially during 2H2020, are noted as follows:

·         Pandemic has hit NBFCs hard. “The impact of the pandemic can be seen on both asset quality and liquidity, although the latter was addressed to a considerable extent through timely policy measures.”

·         An unfavourable mix of COVID-19, sell-offs in financial markets and the abrupt winding-up of specific schemes by a mutual fund contributed to NBFCs facing record spike in yields on their debt in Q1: 2020-21. The sharp market differentiation continued between the highly rated and other NBFCs, notwithstanding the surplus liquidity and aggressive policy rate cuts.

·         Retail participation in the NBFC debenture issuances, notwithstanding their small share in overall subscription, witnessed an upswing since June 2020, whereas Mutual funds reduced their exposure to NBFC CPs between March and September 2020 However, Q3:2020-21 witnessed a renewed interest of mutual funds in NBFC CPs. Banks’ subscription of CPs has also increased at a steady pace after Q1:2020-21.

·         The number of deposit-taking NBFCs (NBFCs-D) has gradually diminished and currently stands at 64, of which six have been prohibited by the RBI from accepting further deposits.

·         The consolidated balance sheet of NBFCs registered a Y-o-Y growth of 13.0 per cent and 11.6 per cent in Q2 and Q3:2020-21, respectively. “This double-digit growth in an adverse macroeconomic environment points to the resilience of NBFCs, which were able to cushion the impact of the pandemic on their balance sheets through quick adoption of technology, policy support and reasonably strong fundamentals.”

·         NBFCs continued to preserve cash to ensure adequate liquidity in view of the prevailing uncertainty due to the pandemic.

·         Due to risk aversion and market pessimism post-IL&FS, the share of market borrowings (debentures and CPs) in the total borrowing had fallen and correspondingly the share of bank borrowings had risen. NBFCs also moved towards longer term borrowings in tune with the tenure of their assets to manage their asset-liability mismatch.

·         In Q2 and Q3:2020-21 market conditions had eased, as indicated by the pick-up in market borrowings, particularly in debenture issuances. In the same period, bank borrowings grew at a robust pace, although slight deceleration was exhibited in Q3:2020-21.

·         In the aftermath of the IL&FS event, the NBFC sector attempted to realign its asset-liability mismatches by moving away from short-term borrowings to long-term borrowings. Accordingly, term loans growth remained high at 22.6 per cent and 18.3 per cent in Q2 and Q3:2020-21 (Y-o-Y), respectively.

Term loans constituted over four-fifth of NBFC bank borrowings at end-December 2020, followed by working capital loans and cash credit. While term loans continued to grow at a robust pace, they exhibited a deceleration in Q2 and Q3:2020-21, compared to Q2 and Q3: 2019-20 reflecting tepid demand for on lending of funds. An uptick in working capital loans was witnessed in Q3: 2020-21.

·         Over 70 per cent of the NBFC borrowings are now payable after 12 months and their share has remained stable, indicative of the growing market discipline among NBFCs. Similarly, over 70 per cent of NBFC advances are also now long term (that is, receivable after more than one year).

·         The industrial sector remained the largest recipient of credit from NBFCs-ND-SI even as its share moderated between Q3:2019-20 and Q3:2020-21. Retail sector, followed by services, are the other major beneficiaries and their share grew during the period under consideration.

·         Industrial sector, particularly micro and small and large industries, seemed the worst hit by the pandemic as they posted decline in credit growth. Imposition of lockdown, abrupt stoppage of economic activities and disruption in supply chains to contain the spread of the virus could have affected these sectors the most.

·         Passenger vehicles sales increased by 13.6 per cent in December 2020. It is mirrored in the disbursal of vehicle loans by NBFCs, as these loans grew by 10.7 per cent in Q3:2020-21. Loans against gold also grew robustly as it filled in the cash requirements and possible working capital requirements of small firms.

·         The profitability of the NBFCs improved in Q2:2020-21 compared to the corresponding quarter of the previous year on account of steeper fall in expenditure than in income. Given the persistence of infections, the full effects of the lockdown and suspension of business on the asset quality of NBFCs will be evident gradually.

 The localized lockdown and mobility restrictions in past 6weeks have led to scaling down of FY22 GDP growth estimates. The new estimates mostly imply that Indian economy may record marginally negative growth during two period from April 2020 to March 2022. These estimates though assume (i) No community transmission of infections; (ii) no nationwide lockdown; (iii) no wider shutdown of industries and construction work; and (iv) normalization of mobility restriction in 2HFY22. Any further worsening of pandemic situation may lead to further downgrade of growth estimates resulting in spillover impact over FY23 as well.

The global rating agency S&P, recently published a note saying, “The possibility the government will impose more local lockdowns may thwart what was looking like a robust rebound in corporate profits, liquidity, funding access, government revenues, and banking system profitability.” The note further stated that agency is “looking at two scenarios, both entailing a cut in its GDP growth forecast for India:

·         In a moderate scenario, new infections peak in May 2021. If that happens, the hit to India’s GDP growth is estimated at 1.2 percentage points, indicating that India’s GDP is likely to grow 9.8% in FY22 compared with 11% growth estimated previously.

·         In a more severe scenario, new infections peak in late June 2021. In this case, the hit is estimated at 2.8 percentage points, with growth of 8.2%.”

As reported by Bloomberg, the scenario projections by S&P assume that initial shocks to private consumption and investment filter through to the rest of the economy. For instance, lower consumption will mean less hiring, lower wages, and a second hit to consumption, the note said. The severe scenario, which assumes hits to economic growth and infrastructure sector cash flows, presents more downside risks. Leverage remains elevate.

Incidentally, the current estimates appear to assuming a fast normalizing developed world, and hence buoyant export sector and capital flows.

IMF has projected US and China economies to move beyond their pre-Covid levels in 2021 itself, led by sharp rise in both consumption and investment. Even EU that bore the brunt of pandemic in 2020, is expected to reach near pre-covid level in 2021. This essentially implies rising global inflationary pressures creating possibilities for an earlier than currently forecasted monetary tightening. The capital flows to emerging market may there get impacted, if these forecast come true.

What no one is forecasting is a re-lapse of pandemic in the developed world. Rationally, it does not look likely, given the speed of vaccination, development of preventive ecosystem and treatment protocols. However given that the virus is mutating itself fast, assigning zero probability to this occurrence in economic forecasts may not be fully appropriate. God forbid, if this happens, Indian economy may decline rather precipitously.

The government had surprised the markets by maintaining strict fiscal discipline in Union Budget for FY22. So far we have not heard any relaxation in budget estimates of fiscal deficit. However, any worsening of conditions from here may require another dose of fiscal stimulus. It is pertinent to note that the fiscal stimulus last year was mostly focused on capacity building and easing liquidity. The present conditions require strong social sector spending program, which primarily aims at cash handouts. The recent setback to the ruling BJP in UP local body elections and West Bengal assembly elections; and continuing farmers’ agitation may motivate the government to consider material cash subsidies to poor and farmer ahead of critical state assembly elections in UP, Punjab, Odisha, Goa and Uttrkhand. All these elections are due in February/March 2022.

Insofar as stock market is concerned, the consensus appears to be leaning towards the strategy that the localized lockdowns may not hamper the industrial and construction sector like 2020, as the government has spared the manufacturing and infrastructure activities from lockdown restrictions. The consumption may however get impacted materially. Cyclical over Consumers appears the preferred trade as of now.

More on this next week.