Glimmer of hope for urban consumption may not suffice

By Pallavi Pengonda, Harsha Jethmalani
While the GDP data may show a recovery in the coming quarters, the plight of smaller companies would go unnoticed, even as urban consumption demand sees a

Shopping for the right talent has become an expensive affair in the tech world. With counter-offers pouring in, candidates looking to switch organizations are making the most of the ongoing talent war in the information technology (IT) sector.

The good news is the sharp spike in income levels in the technology sector is expected to boost consumption, especially in urban areas. “The steep rise in salaries in the IT and technology-related industries has come as a blessing. This is a positive structural change and would boost urban consumption in a meaningful way in certain pockets and sectors," said Arshad Perwez, vice-president, JM Financial Institutional Securities Ltd.

As schools and offices gradually return to normalcy, consumers are likely to feel upbeat after being cooped up indoors for more than a year. A section of urban Indians has not travelled the past year and is sitting on extra cash. With the increasing pace of vaccinations, it is expected that they will start spending more in various ways. According to Perwez, “Demand for residential real estate, consumer discretionary products, restaurants and travel-related sectors are likely to benefit immensely from higher spending." Here, southern India and NCR are expected to benefit more, given these are IT hubs.

Note that listed real estate firms have restarted launching projects with the festival season around the corner. It also helps that home loans are cheaper, and residential real estate prices in key cities have been largely stagnant. August data is encouraging, with property registration of 6,784 units (including primary and secondary sales) for Mumbai city. This is 16% higher versus August 2019.

Healing path
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Healing path

Amit Shah, head of India equity research at BNP Paribas, said, “With the aftermath of the pandemic slowly receding, urban consumption has shown good resilience." On the other hand, rural demand can be a dampener, considering that the monsoon has been muted this time compared to the past two years. “Nonetheless, we feel the worst is over for consumption. We have seen consumption demand growth of 6-8% two-year CAGR in the past four quarters, and over FY21-23, we expect 10-12% CAGR. What makes us more confident is that we are seeing consumer discretionary doing well," Shah said. CAGR is compound annual growth rate.

Further, it is encouraging that tax collections have been good. “Central government’s gross tax revenues for April-July 2021 are +83% y-o-y/+29% against April-July 2019 to 7 trillion. Direct taxes for April-July 2021 are up 41% versus April-July 2019; while indirect taxes for the same period are up 19%," said analysts from Jefferies India Pvt. Ltd in a report on 1 September. Further, EPFO payroll data, a proxy for formal sector job creation, shows total net additions in the June quarter have been healthy.

Overall, the factors mentioned above augur well for urban consumption demand. Moreover, the jump in the market capitalization of many companies shows investors are anticipating the demand outlook to be strong ahead.

“Even so, better urban consumption won’t be enough to offset the slow consumption on an aggregate basis," pointed out Perwez. Not without reason. For one, the benefits would accrue to only certain pockets. Moreover, it remains to be seen whether demand, led by pay hikes, is sustainable, which typically happens when there is an overall economic revival. As such, a broad-based revival in residential real estate sales across segments and geographies in the near term appears difficult.

In general, how the monsoon pans out in September would set the tone for the overall season and rural consumption. There is also a looming risk of the third covid wave, and if that happens, activity levels will slow down again.

To be sure, a large part of India’s gross domestic product (GDP) consists of the unorganized sector, badly bruised by the pandemic. The GDP data does not fully capture the informal economy’s contribution due to data collection-related constraints. Smaller and regional firms operating across sectors have been the key casualties of the covid-19 pandemic. Delayed client payments and a spike in working capital needs due to elevated raw material prices amid volatile demand conditions are said to have made survival difficult for many of these companies.

As such, the overall employment situation is far from inspiring. “The employment scenario in the unorganized (non-financial, non-IT) services sector is likely to be even worse than their organized counterparts. This is worrisome as this broad sector accounts for almost half of India’s workforce and three-fourths of the total non-agricultural workforce," said economists from ICICI Securities Primary Dealership.

So, while the GDP data may show a recovery in the coming quarters, the plight of smaller companies would go unnoticed, even as urban consumption demand sees a pickup.

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