The signs are unmistakable. GST collections for October were at an eight-month high and crossed the psychological barrier of Rs one lakh crore for the first time this fiscal. Also, two-wheeler dispatches by market leader Hero MotoCorp were at record eight lakh units. Sales of diesel picked up (up nearly 7%) as did electricity demand (up nearly 14% in October) and e-way bill collections were up by a fifth last month. These data have raised hopes of a faster-than-anticipated economic recovery, as demand seems to be returning. So, is the worst behind us already? Perhaps the hoorahs need to be tempered with a dose of caution.
Sales in some sectors have picked up due to a combination of festive buying, pent-up demand and steep discounts. But this rise in tax collections or sales of vehicles need to sustain in the coming months, without high discounts and in more geographies, for economic recovery to take effect. Also, the unemployment rate needs to come down for demand to sustain. According to CMIE data, the all-India unemployment rate in October at 6.98%, an increase from the 6.67% seen in September. After falling for weeks, the unemployment rate in rural India is on the rise again, touching August levels in the week ending November one.
The key to broad-based economic recovery has to be sustained growth in most of these metrics – retail vehicle sales, GST, income tax and corporate tax collections and in employment. A new round of fiscal stimulus from the government wouldn’t hurt, either. Till now, the measures announced as fiscal stimuli have helped only some sections of consumers. Finance Secretary Ajay Bhushan Pandey has once again indicated that the fiscal stimulus window is not closed.
Meanwhile, the October data need to be read with caution. Hero has reported highest ever sales of almost 807,000 units in October, an increase of 35% from the same month last year. But these are wholesale dispatch numbers, indicating the stocking of dealers by the company and not final sales to consumers. Since November is a month of continued festivities – Dhanteras, Diwali, Bhai Dooj and Chhath to name a few – two-wheeler makers are sending increased supplies to dealers in anticipation of higher sales. On their part, dealers seem to be offering higher discounts than last year to push sales. The key to economic revival is in increased sales of dealers in November.
“The October dispatches are a sign of continued festive growth expectations of OEMs (manufacturers) as second phase of festive season kicks off in November; however, rising discounts do not correlate with demand strength narrative. We believe channel inventory clearance remains key dealer task (our estimate is over six weeks) in November. Thus, any slack in retail demand could disrupt wholesale dispatches of OEMs in December,” analysts at ICICI Securities have pointed out.
In any case, ratings agency CRISIL has forecast a 15-17% decline in two-wheeler sales this fiscal even after improved sales of entry level motorcycles. These ‘economy’ segment bikes account for 53% of overall bike sales and three in four such bikes sell in the Indian hinterland. So, by extension, the spike in two-wheeler retail sales could be largely due to improvement in the rural economy while growth takes its own sweet time to come back to urban markets.
As for the jump in GST collections, the year-on-year increase for two months in a row – collections rose five per cent in September and eight per cent in October — is certainly goods news but the gross collections remain down by a fifth in the April and October period. Like with two-wheeler sales, the growth in GST collections could well fade in the non-festive months due to the lack of any meaningful fiscal stimulus.
Sachin Menon, Partner and National Head of Indirect Taxes at KPMG, said that per month GST collection has to be deposited by the 20th of next month so the figures released by the government for October are actual collections for September. “There could be some element of pent up demand but even September (August collections) collection was up five per cent….if the rate of collections remains as robust as in August and September then full year shortfall compared to 2019-20 could fall to just about 10%”.
While assessing macro numbers and before cheering the October highs, we need to also look at the continued high in new daily Covid-19 infections amid reports of drop in testing by some states. A study by the country’s top medics has again predicted multiple infection peaks in coming days. So while sales in select categories are returning to near normal levels, the sustainability of economic recovery is still in doubt.
Analysts at brokerage Kotak Institutional Equities have pointed out that the pandemic has impacted household incomes leading to lower consumption demand besides downtrading (opting for cheaper goods) in some sectors.
“At the same time, the pandemic will accelerate consumption in certain sectors as consumers seek convenience (packaged food, consumer appliances), hygiene (branded QSR chains for in-dining) and safety (2W/4W automobiles). The extent of the overall decline in consumption will depend on the combined effect of (1) decline in household incomes; household income will decline in aggregate given our projection of 11-12% decline in real GDP growth in FY2021 (2) possible change in household consumption-saving mix; we suspect possible further decline in household savings rate to support consumption (3) government support to households.”
All eyes are now trained towards the next tranche of the fiscal stimulus package to catalyse economic recovery through the remaining months of the fiscal.