K Shape recovery's deep footprint

The story: India went through a strong second Covid wave, starting April 2021. A clear result now visible is that stronger enterprises are gaining at

K Shape recovery's deep footprint

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• The story: India went through a strong second Covid wave, starting April 2021. A clear result now visible is that stronger enterprises are gaining at the expense of weaker ones. The RBI's estimate of loss of economic output has been approx. Rs.2 lakh crore.
• State of the economy report: RBI issues a report each month, and the latest indicates the impact of regional lockdowns. The second wave spread to smaller cities and villages, impacting rural demand. India's GDP in 2020-21 was insulated from any rural shock, largely.

1. RBI's optimism about the future was seen in its quoting the late British PM Churchill: “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty."
2. RBI then points out: “Life- and work-style transformation such as increased remote work and online shopping may likely endure. When patterns of demand shift, some firms may face closure. Some industries may become permanently smaller."

• Under-statred: The RBI has almost silently said the most visible damage from the pandemic, to Indian economy. Many small shops and micro, small and medium enterprises (MSMEs) have shut shop in the past 12 months. That's so because of localized lockdowns leading to a loss of regular business, and the business was captured by big e-commerce companies. That's normal for any free market economy, but with India's level of per capita and joblessness, a rather bad omen.
• Theory of it: The point of economic activity is consumption, and producers produce in order that consumers may consume. Sellers sell in order to buy. But what’s good for the consumer comes at a cost, borne today by the smaller fish. Surveys indicate clearly that many MSMEs are in trouble. Most will have no cash left in a few months, and may retrench workers on a large scale. It is only to be expected as for 12 months now, India has had some type of disruption or the other. The big fish sail through, given huge balance sheets and cash reserves.
• Squeeze the small guy: India's big firms have been renegotiating their supply and work contracts with suppliers and contractors, and the MSMEs have had to bear the brunt of this. Listed companies of India continue to make record profits, leading to share prices going through the roof. Financial results of 1,481 listed companies for the January-March 2021 period show they made a net profit of Rs.1.8 trillion, nearly 15% higher than the record profits of the previous quarter.
• Summary: As the youth enter the workforce and find jobs, they earn money and spend, creating more demand, leading to more job creation. In India, the big have become bigger and the small have been destroyed. Since most of new jobs are created in the process of smaller businesses growing bigger, the so-called demographic dividend itself may remain under-utilised.

 

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