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Recovery hurdles: The salary-cut cloud on consumption: Financial Express 4th Dec 2020

 Employment has been one of the victims of the Covid-19 lockdown. However, the data seem to present a contrasting picture. EPFO data shows job creation, and the government has used this data to pay, under Atmanirbhar Bharat 3, the EPF contributions of the employees and employers for the new jobs. CMIE data, on the other hand, has been indicating an increase in unemployment. Both approaches have their advantages as well as limitations.

Employment generates income for households, which then spend this and spur consumption demand; this, in turn, supports higher production, and, hence, growth. Therefore, income generation is the goal. Today, while there is some satisfaction over spending in the festive season (October and November), there is apprehension on its sustainability. This is why creating jobs is so essential.

Since the gradual easing of the Covid-19 lockdown began, post-June, things have changed quite significantly. Companies not only had stopped hiring new talent during the lockdown as economic activity had halted, as machine operations or services halted, labour had to be shed. With little hope of activity returning to normal, SMEs bore the brunt.

Those that wanted to be gentle on the staff invoked salary cuts either with absolute reductions, zero increments or by assigning the larger part of the salary to the variable component. In the latter case, if the company could not get back to normal, the variable pay would be cut significantly. The industries affected the most, right up to October, were hospitality, media, entertainment, tourism, aviation; non-essentials in manufacturing have crawled towards normalcy post-June as movement restrictions remained.

An analysis of data shows things were not all good for labour in the corporate sector. The accompanying graphic provides the overall salary bill for 2,957 non-finance & non-IT companies. The two segments are excluded as they were functional during the pandemic, and, hence, were not affected in terms of staff count. In fact, as of November, several in these two sectors have started paying increments and bonuses.

In the first quarter of FY20, the salary bill came down by 7.2%, which was followed by a 4.6% fall in the second quarter—a reduction of Rs 5,764 crore and Rs 3,751 crore, respectively. Thus, the cumulative fall was close to Rs 9,500 crore. This was mainly due to salary cuts and reduction in headcount by several companies; the services sector, which remained virtually closed during the first two quarters, was the worst-hit. It was only in October that things eased to an extent.

The number will surely be higher if the unorganised sector or the very small units which were the most affected by the pandemic restrictions, are included. This means a large overall income that could have translated into spending was drawn out of the system. Hence, a discussion on the revival of consumption, on account of pent up demand, has to be measured against this background. While discretionary spending does tend to rise during the festive, the sustainability of the same would depend on the purchasing power.

The private sector is clearly not up to this task. Post-September, some companies have announced that they would be restoring the salaries of employees, a good move given the unlock process is on. Several employees with housing loans—with the repayment moratorium ended—would find the restored salaries adequate to service debt. In fact, the corporate sector has put on an ambivalent show in Q2, where sales fell but profits surged, mainly due to salary bill savings. However, this is not how things should play out.

While restoring salaries is a good sign, uncertainty may throttle confidence and, consequently, impact spending. When it comes to spending, it is necessary to have high confidence levels, but this has been missing. And, the announcements of differentiated lockdowns being imposed by some states could mean restoration of salaries and jobs may get delayed further. This is not good news.

The government had taken steps in Atmanirbhar Bharat 2 to prod government employees to spend by allowing them to use their LTC for spending on consumer goods. While it was a sound move in theory, bear in mind that this would not change aggregate consumption but merely shift the spending from holidays to manufactured goods. Here, too, the condition that the LTC-amount-equivalent needed to be matched by ‘own spending’ of twice this amount is a dampener, especially in these trying conditions. To get a benefit on say Rs 1 lakh, one would have to pitch in Rs 2 lakh of own funds. In these uncertain times, drawing money from one’s savings to finance a purchase which carries tax benefits may not have much appeal.

Also, the government has released the bonus that had to be paid for last year during the festival season, besides providing interest-free advances to all staff. But, most of these measures involve giving the staff what was already part of their remuneration package, and, hence, does not really mean enhancing salaries. Normally, people tend to spend when their salary increases and getting what is already a part of their salary a little earlier than usual may not create any ‘wealth illusion’ to encourage spending more.

On the credit side, too, households have exercised caution, as witnessed in the change in credit in the six-month period if March to September. Retail loans increased by just Rs 18,000 crore, driven up by mortgages (which had the support of moratorium till August), and ‘other loans’ increased by a mere Rs 38,000 crore and while loans against FDs got pushed down by Rs 16,000 crore. Loans for durable goods as well as credit card spending has declined during this period, showing considerable caution in terms of borrowing for purchasing goods and services.

One of the growth engines for any economy is consumption, and this has been our Achilles heel for the last couple of years. Earlier, it was a question of more jobs being created. Now, the lockdown has induced companies to take certain stringent actions to protect their bottom lines.

This has involved salary-cuts and fewer additions to the workforce. This has to be reversed soon to restart the consumption cycle, and fewer variants of lockdowns should be the norm to ensure there is more certainty in business. Otherwise, the spike seen in October-November in consumer spending may eventually turn out to be a mere aberration.

RBI policy: Clearly more sanguine on growth, but cautious on inflation: Business Standard 4th December 2020

 The RBI monetary policy action in the last couple of policies was quite predictable, as inflation has been high and the economy has moved from the ‘lockdown’ to ‘unlock’ phase. This, in a way, has made it easier to take a decision and hence the market should not really be surprised. However, the immediate reaction was a slight upward movement in the 10-years G-Sec.

The Reserve Bank of India (RBI) has been working on the liquidity side to guide interest rates, especially on bonds, as given the large volumes of borrowings by the government, interest rates should have increased. The combination of open market operations (OMOs), operation twist and targeted long-term refinance options (TLTROs) has helped immensely to achieve this objective. In fact, the announcements made in the last policy of allowing banks to reverse the LTROs was a way of drawing back on the quantitative easing (QE), which was brought about in a definite way since March when the lockdown was imposed. Hence, there has been a lot of discretion showed by the central bank, as there have been large investments made by banks in the overnight reverse-repo auctions.

The RBI, however, in its statement has indicated that there is still room for monetary policy support for growth, which is not yet broad-based, as per the latest information available. Hence, one may expect that the RBI can cut interest rates based on the inflation trajectory. That said, a lot will depend on how food inflation moves in the next few months. The expectation is that inflation will be above 5.5 per cent for the rests of the year with Q3FY21 at 6.8 per cent and at Q4FY21 at 5.8 per cent. Quite clearly, the scope for rate cuts in the financial year will be difficult under these conditions. It is more likely that rate cuts can be invoked earliest in financial year 2021-22 (FY22).

However, there is assurance given that there will never be an issue on liquidity through various measures. The on-tap TLTRO funds will now be expanded to the 26 sectors identified by the Kamath Committee, as also healthcare. This brings it in alignment with the government’s move to extend the Emergency Credit Line Guarantee Scheme (ELCGS) coverage to these sectors in November. Therefore, the system need not really worry about liquidity.

These measures will actually ensure that while basic regulatory rates have not changed the market yields on bonds will remain stable and the infusion of liquidity as and when required will ensure that they are range bound. This benefit will percolate to corporate bonds, too, as pointed out by the RBI that spreads over G-Secs has returned to the pre-pandemic levels and hence in general borrowing costs should be stable.

The RBI’s take on growth is interesting as it is looking at marginal positive growth in Q3 and Q4. This is based on faster-than-expected recoveries witnessed in several sectors including services. While Q4 forecast is more or less in lines with the market, the Q3 forecast is unique even though growth is to be just 0.1 per cent. This will imply that the RBI expects sustenance of demand in December, too. If this does happen, it can be said that growth in Q4 could be even higher. The overall forecast of -7.5 per cent for the year appears to be in line with CARE Ratings’ estimate of -7.5-7.7 per cent.

The curious message we get form the statement is that inflation is no longer the only target and we are back to the old days when both growth and inflation were targets for monetary policy. There is, hence, no talk of raising rates even though inflation is going to be well above the 4 per cent mark through the rest of the year. While this could be due to unusual conditions this year, it will need to be seen whether this stance continues into FY22.

ON TV

 1st december 2020

https://www.timesnownews.com/videos/et-now/shows/is-eco-recovery-on-track-in-november-india-development-debate/82557