A for Auto, D for the rest: India July Report Card

It looks like the green shoots that we saw in June did turn into brown. Barring the automotive sector, things aren't looking good for the Indian economy

And the leaves that are green 
Turn to brown 
And they wither in the wind 
And they crumble in your hand 

When Simon and Garfunkel wrote this back in 1966, it is unlikely they would have thought that their song would be used repeatedly in the context of the Indian economy more than fifty years later.

First, in June, we saw some green shoots in the economy. Then we had some doubts on whether a 10% fall in demand for energy was a good or a bad thing. Now it seems like we have conclusive evidence that economic growth is not going to happen for a while at least.

While the national lockdown ended with the “unlocks” that started in early June (now we’re in “unlock 3.0” territory), states and cities have continued to impose sporadic lockdowns after that (Bangalore, for example, was shut down for a week in the middle of July). And these localised lockdowns seem to have played havoc with supply chains, and July saw a faster contraction compared to June.

Data released by analytics firm IHS Markit showed that Purchasing Managers’ Index (PMI) for manufacturing declined slightly in July to 46 from 47.2 in June. A figure above 50 indicates expansion, while a sub-50 print signals contraction.

Eliot Kerr, an economist at IHS Markit, said the survey results showed a “re-acceleration of declines" in the key indices of output and new orders, undermining the trend towards stabilization seen over the past two months.

“Anecdotal evidence indicated that firms were struggling to obtain work, with some of their clients remaining in lockdown, suggesting that we won’t see a pickup in activity until infection rates are quelled and restrictions can be further removed," he added.

The dominant story in April and May was of migrant workers trying to get back to their villages after the pandemic crippled their job opportunities in the cities. This shift in population led to an increase in rural consumption, leading analysts to assume that rural India would bail out the economy. That assumption now seems unfounded.

Having returned to their villages, migrants are now finding it difficult to find work there (you don’t need an economist to tell you that when there is a sudden influx of people, jobs will be harder to come by).

Official records show that of the 64 lakh migrant workers across 116 districts in six states — Bihar, Uttar Pradesh, Rajasthan, Madhya Pradesh, Jharkhand and Odisha (covered under the Garib Kalyan Rojgar Abhiyaan), a quarter returned to just 17 districts across these states.

The highest number of returned migrants under the scheme has been registered for Bihar, with 32 districts accounting for 23.6 lakh or 37.2 per cent of the total migrant workers covered, followed by Uttar Pradesh, with 17.47 lakh returned workers (27.5 per cent of the total) and Madhya Pradesh with 10.71 lakh workers or 16.9 per cent of the total.

The progress of the monsoon and a good summer sowing notwithstanding, the surge in Covid-19 case numbers in Bihar, Jharkhand and Uttar Pradesh is beginning to hurt the rural economy and so most of these workers are struggling to make ends meet.

Here is a nice long read from Mint about how rural India won’t save the economy.

In June 2020 India’s energy consumption was 10% lower than June 2019, and we had seen conflicting signs of whether that was a good or a bad thing. There were no such doubts in July, as fossil fuel consumption was a full 21% lower than last year.

Electricity consumption also continued to fall, though at a slower rate when compared to June.

Moreover, this fall in energy consumption meant that coal power plants, which usually contribute to the “base load” (steady load) of electricity (and is the cheapest source of electricity), saw a dip in production. Their place was taken by more expensive, but easier to turn on or off, gas power plants. India’s use of gas for power production was at a three and half year high last month.

An Auto Revival

Not everything is so gloomy, however. In the midst of reducing manufacturing and falling fuel consumption and increasing rural distress and sharply lower real estate sales, the automotive sector offers a ray of hope. Both four-wheeler and two-wheeler companies are ramping up their production facilities as they foresee an uptick in demand later this year (possibly due to purchases being delayed thanks to the pandemic).

So far, car sales have been lower than last year.

Top carmaker Maruti Suzuki NSE 2.49 % said its sales in July came in at 108,064 units, a decline of 1.1 per cent from a year ago, but a jump of 88.2 per cent from the month before. 

In the passenger vehicles segment, Mahindra sold 11,025 vehicles in July against 16,831 a year before. 

However, a strong recovery is expected later this year. India’s two largest car makers are looking to take their production back to 2017-18 levels, when automobile sales peaked.

Maruti plans to produce 160,000-170,000 vehicles in October, and has also asked suppliers and employees to work extra days during the month, the two people said, requesting anonymity. Hyundai, on the other hand, is likely to manufacture 58,000-60,000 vehicles as it expects demand for its Creta and Venue utility vehicles to peak during Diwali, which falls in November, they added.

The plans of Maruti Suzuki and Hyundai are a bellwether for India’s car industry as they had a combined 68% share of the domestic passenger vehicle market in the fiscal year ended 31 March 2020.

The auto industry has not been immune to local lockdowns. The same article in Mint had this to say about Maruti Suzuki:

“As of now, we are not limited by demand but by supply. We have suppliers in 46 districts in nine states and local lockdowns are impacting their operation. We are running the Gujarat plant with one shift due to rising covid-19 cases and plan to start the second shift from August, which will help us add another 900 cars per day," said Rahul Bharti, vice-president, corporate planning and government affairs, in a post-earnings conference call with analysts on 29 July.

Two wheeler sales are also expected to go up in the coming months, going by retail demand and manufacturers’ plants for ramping up production.

The production schedules for almost all two-wheeler companies in August and September are close to 100%, said four people supplying two-wheeler manufacturers.

Bajaj Auto executive director Rakesh Sharma told ET the recovery had been faster than many had expected. “The demand has returned very swiftly. The sale in the first half of July is back to normal levels, though it did take a hit in recent days due to new lockdowns. The clear signal from the market is that this momentum can sustain in the coming months unless there are any major lockdowns announced across the country,” he said.

Among all classes of automobiles, one class that has already shown significant uptick in sales is tractors.

Mahindra & Mahindra’s Farm Equipment Sector (FES) said its total tractor sales (domestic + exports) during July were at 25,402 units as against 19,992 units for the same period last year. Domestic sales in July were at 24,463 units, as against 19,174 units a year ago. Exports for the month stood at 939 units. 

“These are our highest ever July (tractor) sales. The strong demand momentum continued, aided by positive sentiments due to good cash flows to farmers, higher Kharif sowing, a timely and normal monsoon cumulatively across June and July and continued higher rural spending by the government,” said Hemant Sikka, President - Farm Equipment Sector, Mahindra & Mahindra. 

Back in the cities

We are now afraid to use the term “green shoots” (after what happened last month), but it looks like there are some small signs of recovery in urban areas as well. There is a small increase in hiring in blue collar jobs in metros.

Ninety percent of companies surveyed in Bengaluru confirmed their intent to increase the hiring of blue-collar and entry-level workers in the third quarter of 2020 against 86% in Mumbai and 76% in Delhi, according to the Employer Sentiment Survey by OLX People, an HR platform. The company surveyed around 200 companies across 14 cities during June.

“Most employment recovery, whatever little is happening, is likely to happen in Bengaluru, Delhi, Pune, Hyderabad, Chandigarh, Mumbai and Kolkata. A large chunk of the movement will happen in tier-I cities," Rituparna Chakraborty, co-founder and executive vice-president, Teamlease Services, told analysts.

Once again, localised lockdowns might be a dampener, as the same article goes on to say that uncertainty over lockdowns might delay hiring.

Mint used some Google Mobility data to show that some large states are showing signs of revival. Mumbai is not one of those, and has seen sharply lower real estate activity this year compared to last.

We will leave you with this interview with Raghuram Rajan, former Governor of the Reserve Bank of India. He is not optimistic at all.

A number of emerging markets are facing not just lost years of growth, but lost decade of growth. We have to be careful we're not in that group and for that we need strong, sustained, clever action today.