Reading the tea leaves

by Mahesh Vyas

Expectations of a faster revival of the Indian economy gained ground after the better-than-expected growth estimates of the second quarter. In the first quarter, real GDP contracted by 23.9 per cent. On the eve of the release of the second quarter estimates in late November 2020, the consensus estimate from a Reuters poll was of a 8.8 per cent contraction. This was a significant improvement over the expectation of a 10.1 per cent contraction seen in a RBI consensus estimate in early October 2020. But, the economy surprised with a significantly smaller contraction of 7.5 per cent. This has raised hopes of a faster recovery than expected earlier. Estimates of real GDP contraction in fiscal 2019-20 have been revised from 9.1 per cent in early October to 8.3 per cent by early December.

Now, what about expectations for the third quarter? In early October, the consensus expectation was of a 3.1 per cent contraction in real GDP in the third quarter. By early December this had improved to a smaller contraction of 2 per cent.

Employment statistics from CMIE’s Consumer Pyramids Household Survey informed us that in a year-over-year comparison, employment fell 20.3 per cent in the first quarter and by 3.5 per cent in the second quarter. In both quarters, real GDP fell more sharply than employment. But, both measures change in real GDP and in employment gave the same message that there was a very sharp fall in the first quarter and then there was a significant recovery in the second quarter as the rate of contraction had reduced.

Official quarterly real GDP changes in India mostly reflect the performance of the organised sectors. Employment data from CMIE covers both, the organised and unorganised sectors much better. It seems to provide a reasonably good insight into the direction in which the economy is likely moving. The advantage with the employment data is that it becomes available much faster than the GDP data. The GDP data are released two months after the quarter ends. The employment data on the other hand is available on the day immediately following the day the quarter ends. More importantly, the employment data is also available month by month and week by week. These monthly and weekly estimates provide an early idea of where the quarter is likely to end.

So, what do the employment data tell us about the recovery in the third quarter of fiscal 2020-21, 10 weeks into it? To answer this we understand the recovery process, or its momentum and then make an estimation.

In the quarter ended March 2020, total employment in India was estimated at 406 million. This fell sharply to 320.6 million in the first quarter of fiscal 2020-21, i.e. the quarter ended June 2020. Much of this fall was recovered in the quarter ended September 2020 when employment was back to 394.9 million. It was still short of the level in the March 2020 quarter and of the year-ago quarter. Nevertheless, it was an impressive and quick recovery.

Employment in each month of the second quarter was higher than it was in its preceding month. The recovery was progressing. But, it was progressing increasingly at a slower pace in each of these months. This is partly understandable because the initial gains can be large as self-employed persons got back to their trade when the economy opened up and desperation drove daily wage labourers to accept any form of employment even at lower wage rates. Soon these options were exhausted and the pace of recovery slowed down during the second quarter.

In the first month of the current, third quarter, employment stopped registering any further gains. It slid. Half a million jobs were lost in October compared to the September estimate. This is statistically too small and insignificant. It could very well be the case that there was no change in employment from September to October. But, even that would be a poor outcome.

In November 2020, employment fell by a significant 3.5 million. Cumulatively, employment has fallen by four million during these two months. At 393.6 million in November 2020, employment is still about 10 million short of what it was in the March 2020 quarter.

Weekly estimates for the first three weeks of December indicate a likely marginal improvement in aggregate employment compared to November. We only generate the three major ratios on a weekly basis and not the aggregate values, such as the number of people employed. The labour force participation rate has improved. The average LPR in the first three weeks of December at 41.4 per cent was significantly higher than November’s 40 per cent. However, the enthusiasm of this labour in entering the labour market was met with a very high unemployment rate. The unemployment rate shot up from 6.5 per cent in November to 9.5 per cent average in the first three weeks. As a result, the employment rate has risen marginally from 37.4 per cent in November to a three-week average of 37.5 per cent. With this, unless there is a big surprise in the last ten days of December, it is likely that employment could close at 394 million in December 2020. And, the third quarter of fiscal 2019-20 would end with employment of 395 million.

This implies that employment in the quarter ended December 2020 would be 2.5 per cent lower than the 405 million employed in the December 2019 quarter. Apparently, the economy would shrink very marginally lesser than it did in the September 2020 quarter.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.2 -0.1
Consumer Sentiments Index
Base September-December 2015
53.9 +0.3
Consumer Expectations Index
Base September-December 2015
55.7 +0.5
Current Economic Conditions Index
Base September-December 2015
51.1 0.0
Quarterly CapEx Aggregates
(Rs.trillion) Mar 20 Jun 20 Sep 20 Dec 20
New projects 3.80 0.83 1.05 0.86
Completed projects 1.77 0.25 0.72 0.58
Stalled projects 0.73 0.11 0.08 0.30
Revived projects 0.42 0.68 0.36 0.08
Implementation stalled projects 10.18 0.09 0.07 0.12
Updated on: 22 Jan 2021 8:28PM
Quarterly Financials of Listed Companies
(% change) Mar 20 Jun 20 Sep 20 Dec 20
All listed Companies
 Income -5.0 -27.6 -6.2 9.0
 Expenses -1.9 -27.9 -10.1 5.8
 Net profit -48.9 -40.3 45.2 35.8
 PAT margin (%) 2.3 5.3 8.3 19.0
 Count of Cos. 4,357 4,351 4,316 218
Non-financial Companies
 Income -9.0 -37.4 -10.4 11.3
 Expenses -4.9 -37.6 -14.0 7.0
 Net profit -50.1 -55.8 29.9 50.9
 PAT margin (%) 3.2 4.5 8.0 19.1
 Net fixed assets 13.3 5.9
 Current assets 3.6 0.8
 Current liabilities 6.2 -2.8
 Borrowings 15.8 8.1
 Reserves & surplus 1.3 4.5
 Count of Cos. 3,241 3,239 3,219 153
Numbers are net of P&E
Updated on: 22 Jan 2021 8:28PM
Annual Financials of All Companies
(% change) FY18 FY19 FY20
All Companies
 Income 8.4 13.5 0.3
 Expenses 9.9 13.8 0.5
 Net profit -41.4 18.5 -11.8
 PAT margin (%) 1.9 2.2 3.8
 Assets 10.9 9.5 9.3
 Net worth 7.4 8.5 4.7
 RONW (%) 3.4 4.0 5.5
 Count of Cos. 29,431 28,732 9,883
Non-financial Companies
 Income 8.6 14.1 -2.6
 Expenses 8.8 14.3 -1.8
 Net profit -10.1 22.6 -24.0
 PAT margin (%) 2.7 3.0 3.9
 Net fixed assets 7.2 5.5 12.4
 Net worth 6.0 8.2 1.7
 RONW (%) 5.6 6.6 6.8
 Debt / Equity (times) 1.0 1.0 0.8
 Interest cover (times) 2.1 2.3 2.6
 Net working capital cycle (days) 77 70 59
 Count of Cos. 23,809 23,199 7,312
Numbers are net of P&E
Updated on: 20 Jan 2021 2:19PM