The Covid lockdown shock derailed the economy roughly this time last year. Recent GDP data shows that the economy is getting back on track. In this article, we look at data for Indian listed companies and find a strong recovery in firm performance.
After two consecutive quarters of contraction, growth returned to the Indian economy in the October-December quarter. GDP stood at 0.4 per cent in the quarter ending December 2020. While the agriculture, manufacturing and construction sectors posted growth, the contraction in trade, hotels, transport and communication was milder as compared to the July-August quarter.
The performance of corporate India shows a sharp recovery. What is interesting is that now the recovery is due to an increase in sales, in contrast to the previous quarter, when firms were cutting their wage bill in order to survive.
We look at data on quarterly financial performance of listed firms in India. Finance companies have very different concepts underlying their accounting data. Oil companies sometimes experience huge swings in revenue owing to decisions by the government. These are not a feature of underlying growth conditions. We, therefore, focus on listed companies other than finance and oil to assess growth in the economy. These include the services sector. To measure manufacturing activity, we again exclude petroleum.
Moving towards recovery
The performance of listed companies for the October-December quarter shows that the Indian corporate sector is gradually moving towards a broad-based recovery. The net sales of companies in the manufacturing sector grew at above 10 per cent. This is significant because it followed six consecutive quarters of contraction.
Corporate India showed a growth of almost 5 per cent in net sales after five quarters of contraction. The rebound in sales in the October-December quarter is seen across almost all the sub-sectors within manufacturing. While all the sub-sectors of manufacturing — ranging from textiles and construction, to metals, machinery and transport equipment — showed a contraction in the April-June quarter, the July-September quarter showed recovery in some sub-sectors.
The recovery has gained further momentum in the October-December quarter. Excluding firms in the consumer goods category and miscellaneous manufacturing category, sales growth was positive in all the sub-sectors within manufacturing.
Similarly, there was a sharp recovery in profits in the July-September quarter. Manufacturing sector profits grew at an impressive 11.75 per cent after registering a sharp contraction of almost 46 per cent in the April-June quarter. However, the sharp recovery in profits was not on account of increase in sales revenue. While profits grew at a staggering 74 per cent, sales revenue witnessed a contraction of around 5 per cent.
How did profits rise despite a fall in sales revenue? The increase in profits was achieved through cost-cutting rather than through an increase in output. Companies resorted to pay-cuts and rationalisation of salaries amid a dip in demand.
However, in the October-December quarter, growth was back on track. The increase in profits was on account of higher output, and not due to wage cuts. After registering a contraction in the previous two quarters, the growth in wages turned positive. Wages of firms in the manufacturing sector grew at more than 5 per cent. For the sector as a whole, wages grew at around 2.4 per cent.
The quarterly financial performance of firms corroborates the encouraging growth trends seen through the GDP number for the October-December quarter.
High frequency indicators suggest further expansion in manufacturing and services activity in the month of January and February. The key highlight is a sharp recovery seen in the services sector. This sector was adversely impacted by the Covid shock. While manufacturing activity remained steady, services sector activity, measured by the IHS Purchasing Managers’ Index (PMI), grew at its fastest pace in a year in February. The sharp increase in the index value was supported by an increase in new work intake. With improvement in business sentiment, and greater capacity utilisation, employment scenario is also expected to improve in the January-March quarter.
A consistent decline in Covid-19 cases and a step-up in vaccination will further support the recovery in growth in the coming months.
Ila Patnaik is an economist and a professor at National Institute of Public Finance and Policy.
Radhika Pandey is a consultant at NIPFP.
Views are personal.
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