It's a deeper recession

by Mahesh Vyas

The recession we pointed out a couple of weeks ago, on February 24, is deeper and more prolonged than stated earlier.

Our analysis earlier was based on the inflation-adjusted year-over-year growth in sales of listed companies. We found that these were negative for two consecutive quarters - quarters ended September 2019 and December 2019. Two consecutive quarters of a decline in volume of sales was the reason for us to state that we were in a recession.

But, a more correct way of spotting a recession is to see if inflation adjusted value addition has declined similarly. This is what we have now done with the financial statements of listed companies. We have created a series of the inflation adjusted value added by listed companies since such a series became available in March 1999. The methodology is explained here.

The results are worse than what was seen in the inflation-adjusted sales series.

Gross value added in the quarter ended December 2019 was 4.5 per cent below the gross value added in the quarter of December 2018. After adjusting for inflation, this estimate worsens sharply to a fall of 9.8 per cent. And, this comes after a whopping 25.5 per cent fall in inflation-adjusted value added in the September 2019 quarter which in turn came after a 3.3 per cent fall in the previous, June 2019 quarter.

Therefore, all three quarter of 2019-20 gone by so far, have recorded a y-o-y fall in the inflation-adjusted value added. This is much more deeper and prolonged recession than we had believed in our essay on February 24.

Then, we had observed that inflation-adjusted sales dropped by 0.6 per cent in the quarter ended December 2019 and by 3.6 per cent in the quarter of September 2019. As per estimates based on inflation-adjusted gross value added, the declines are much deeper - at -9.8 per cent and -25.5 per cent, respectively. Further, while the inflation adjusted sales showed positive growth of 1.5 per cent in the June 2019 quarter, the value added growth shows a fall of 3.3 per cent in this quarter.

The fall in real gross value added of listed companies in the September 2019 quarter was the worst in the history of quarterly financial statements from listed companies, which is from 1999. Implicitly, the fall of September 2019 was the worst in over 20 years. GVA had fallen by 25.5 per cent in this quarter. This was worse than the 18 per cent fall after the 2008 global liquidity crisis.

However, consecutive quarters of fall in inflation-adjusted value added has not been uncommon since the 2008 crisis. In fact, they have been quite common. This was not such a frequent occurrence before 2008.

In the ten years from 1999 through 2008, there were only six quarters out of 40 that pencilled a shrinking of the inflation-adjusted value added. Two of these were in 2008 in the wake of the global liquidity crisis. Before this, three consecutive quarters of 2001-02 recorded falls.

In contrast, the eleven years since 2009 have been very volatile. 20 of the 44 quarters recorded a fall in inflation-adjusted y-o-y growth in value added.

15 per cent of the quarters in the period before 2009 were in the red and, in sharp contrast, 45 per cent of the quarters since then have been in the red. During this latter period, there have been four episodes of three consecutive quarters being in the red. These are in fiscal 2013-14 and 2014-15; in calendar 2017 and now in 2019-20.

The average decline of the three consecutive quarters of 2019-20 is 12.9 per cent. This is the worst of all cumulative declines in three consecutive quarters. The one caused by the global financial crisis led to a 10.1 per cent contraction. The one caused during the period of policy paralysis in 2013-14 was 7.6 per cent. The one in 2014-15 had a smaller impact of 5.7 per cent and the one in 2017 was at 6.3 per cent.

The current decline is therefore the most severe although it is not caused by any external factor. A large part of this decline is because of the severe hit borne by the telecom sector.

But, it is not just telecom. There is a secular decline in other sectors as well. For example, the inflation-adjusted y-o-y change in value added of the manufacturing sector shrunk by over 10.2 per cent in each of the three quarters of 2019-20.

The first three quarters of 2019-20 were not impacted by the new big risk - the Coronavirus that has led to shutdowns or lockdowns around the globe. Shutdowns have begun in India as well. This could impact the fourth quarter. If the fourth quarter also records a y-o-y fall in the inflation adjusted value added then, it would be the first instance of such a sustained fall since 1999.

Whether this happens or not, it is evident that 2019-20 is turning out to be one of the worst years for the corporate sector, and therefore the Indian economy, in over two decades.

Unemployment Rate
Per cent
11.9 +0.3
Consumer Sentiments Index
Base September-December 2015
81.3 -1.8
Consumer Expectations Index
Base September-December 2015
82.3 -1.7
Current Economic Conditions Index
Base September-December 2015
83.7 -1.6
Quarterly CapEx Aggregates
(Rs.trillion) Jun 19 Sep 19 Dec 19 Mar 20
New projects 1.10 2.06 4.97 2.94
Completed projects 0.88 0.83 1.64 0.77
Stalled projects 0.13 0.41 0.60 0.49
Revived projects 0.29 0.52 0.83 0.41
Implementation stalled projects 0.98 0.85 0.15 1.24
Updated on: 10 Apr 2020 9:28AM
Quarterly Financials of Listed Companies
(% change) Mar 19 Jun 19 Sep 19 Dec 19
All listed Companies
 Income 8.5 4.7 -2.2 -1.7
 Expenses 5.4 2.7 -3.1 -2.2
 Net profit 213.1 17.4 -2.3 -10.3
 PAT margin (%) 3.6 6.2 5.3 5.2
 Count of Cos. 4,437 4,452 4,411 4,356
Non-financial Companies
 Income 8.0 2.4 -6.4 -5.4
 Expenses 7.7 1.7 -6.7 -6.3
 Net profit 1.6 -8.5 -14.9 -13.1
 PAT margin (%) 6.2 6.3 5.8 5.8
 Net fixed assets 5.6 10.4
 Current assets 13.2 4.6
 Current liabilities 7.3 4.8
 Borrowings 12.3 8.4
 Reserves & surplus 7.2 5.9
 Count of Cos. 3,322 3,339 3,314 3,267
Numbers are net of P&E
Updated on: 10 Apr 2020 9:28AM
Annual Financials of All Companies
(% change) FY17 FY18 FY19
All Companies
 Income 6.1 8.1 14.9
 Expenses 6.1 9.5 15.3
 Net profit 26.4 -40.2 20.5
 PAT margin (%) 3.3 2.1 3.2
 Assets 8.6 10.9 9.7
 Net worth 9.6 7.6 8.7
 RONW (%) 5.8 3.5 5.3
 Count of Cos. 27,650 25,093 15,291
Non-financial Companies
 Income 5.8 8.2 15.7
 Expenses 6.0 8.4 16.1
 Net profit 23.2 -9.1 19.5
 PAT margin (%) 2.9 2.8 4.1
 Net fixed assets 9.2 6.9 5.1
 Net worth 8.9 6.1 7.7
 RONW (%) 6.2 5.7 8.2
 Debt / Equity (times) 1.1 1.0 0.8
 Interest cover (times) 2.0 2.2 2.8
 Net working capital cycle (days) 84 76 55
 Count of Cos. 22,609 20,449 11,909
Numbers are net of P&E
Updated on: 05 Apr 2020 5:13PM