Have demonetisation and the rocky transition to GST brought Indian businesses to a grinding halt? Ever since the CSO released its quick GDP estimates for the April-June 2017 quarter, pegging growth at 5.7%, there has been a heated debate on this. The debate has generated little light given that GDP estimates provide only broad-brush data on the economy.
For a micro picture on growth trends, we decided to turn to the quarterly results filed by listed companies, breaking them down into individual sectors. Over 1015 companies have filed their results for the last six quarters beginning April-June 2016 and ending July-September 2017. Studying their sales growth patterns threw up these findings.
Consumption revives
The note ban did deliver a body blow to consumer confidence, data from listed firms show. Almost every consumer-facing sector saw a sharp dip in sales for the October-December 2016 quarter — the months when the note ban was in force. But most sectors charted a quick recovery from that blow. Some have even seen growth rates return to levels better than a year earlier.
Aggregate sales growth for Fast Moving Consumer Goods (FMCG) companies slumped from 6.5% in July-September 2016 to 2.9% in the demonetisation quarter. Automobile sales shifted into first gear from 13.2% growth in July-September 2016 to 4.2% in the October-December quarter. Sales for retailers fell off a precipice from a 31% growth to a measly 1%. Consumer durable sales, already sluggish before demonetisation grew at just 3.5% in the note ban quarter.
But all these sectors staged an unexpectedly quick bounce-back from the note ban. FMCGs saw growth pick up to 9.6% in the January-March 2017 quarter itself. Consumer durables saw sales growth zooming to 13% in the quarter immediately following demonetisation, further accelerating to 20% and 16% in the subsequent quarters. Even paints, a discretionary purchase item, saw a doubling of growth in January-March 2017 from the note ban trough. The GST roll-out didn’t pose as much of a challenge for the listed firms. Consumer goods such as FMCG, apparel and automobiles saw a blip in April-June 2017, but were back on the fast track by July-September 2017. In fact, listed firms in FMCGs, paints, durables, apparel and automobiles have all demonstrated their strongest growth in the last two years in the latest July-September quarter.
Services lag goods
Consumer services, however, had a somewhat different story to tell. Revenue growth for telecom, entertainment, hospitality, and media took a sharp knock in the quarter in which demonetisation occurred.
Telecom services went from 7.1% growth in July-September 2016 to a 1.7% contraction in October-December 2016. Entertainment (multiplexes, cable TV providers) saw a halving of growth from 14% to 7% and media firms’ (newspapers, broadcasters, television channels) slowed sharply from 9.2% to 1.2%.
Growth in these sectors has continued to be anaemic through 2017, with the GST transition probably playing a role in subdued sales. Banks alone have seen a marginal uptick in revenue growth post demonetisation, understandable given their deposit windfall.
Why have consumer goods taken less of a hit from GST than consumer services? One explanation could lie in the GST tax structure. GST has reduced the indirect tax burden on most consumer goods, fitting them into lower rate slabs than before.
But it has raised effective taxes on services. Consumer goods firms have therefore been able to use the savings from GST to woo consumers back with discounts and lower selling prices. But service providers, who are already victims of intense competition (think mobile phones and hotel tariffs) in their sectors, haven’t had this luxury. The higher tax incidence in their case has probably dented demand.
In reading the above numbers, it is important to remember that growth rates cited here are a blend of volume and price growth. Commentary from most consumer goods firms suggest an improvement in volume growth in the latest quarter. In the case of services such as telecom or hotels, competition has lowered tariffs.
Capital goods — divided
If the consumer goods firms are signalling a clear revival in 2017 and a limited impact from the GST roll-out, how’s the investment leg of the economy faring? Not as well, show the numbers. Revenue numbers for turnkey infrastructure developers, construction firms and real estate developers were already shrinking in the quarter prior to the note ban (July-September 2016).
After the note ban, they staged a patchy recovery over the next two quarters to hit a growth patch by April-June 2017. But the latest July-September 2017 quarter has seen them back in the doldrums.
These firms seem to have received some order flows from the front-ended Government splurge on roads, railways, rural electrification and the Bharatnet this fiscal. But the flows have dried up lately as the Centre has tightened its purse strings. Private sector capital expenditure continues to remain at a low ebb.
However, not all capital goods makers struggled with poor order flows. While capital goods suppliers to industrial firms were buffeted by the investment slump, those that cater to consumer firms managed business-as-usual.
Auto components, cables and telecom equipment have seen a steady improvement in growth rates through the three quarters of 2017, ending the July-September quarter with growth of 14%, 33% and 14% respectively. These firms seem to have benefitted from the trickle-down effect of demand revival in their user industries.
The gloomy picture on capital expenditure sits oddly with the strong show from sectors such as steel, cement, mining, metals and refineries — suppliers of basic feedstock to industry. But this trend owes a great deal to the rising global prices of industrial commodities which has propped up realisations, amid middling volume growth.
Export-oriented sectors, after sailing through the note ban months, have had a rocky transition to GST. Jewellery, software and pharmaceuticals displayed dwindling growth in the first three quarters of 2017. Textiles and shipping shrank last year and managed a mild revival this year.
GST apart, sector-specific issues have also played villain to some export-oriented sectors.
For software services, the backlash against offshoring and changing business models have posed a challenge. For pharmaceutical exporters, pricing pressure on generics in the U.S. market and regulatory crackdowns have hit growth.
Overall, numbers from India Inc. suggest that, while the economy isn’t back to firing on all cylinders, the accelerating sectors outnumber the slowing ones.
Extrapolating sector-wise numbers to the economy as a whole should come with caveats. In India, only the largest and most established firms tend to list themselves in the public markets. Therefore, these numbers essentially capture the trends for the best and brightest of Indian businesses.
Given that the ‘formal sector’ is widely believed to have made marketshare gains at the expense of unorganised players and unincorporated entities due to the note ban and GST, it is likely that the latter fared much worse. But having said this, the 1,015 firms analysed here account for about 35% of GDP by value.
