Resilient India Inc

The initial set of numbers for the quarter ended December 2016 suggests that demonetisation has had a milder impact on India Inc than originally feared. Aggregate numbers for over 240 companies, including banks, show a 6.2 per cent growth in revenue and a 3.9 per cent growth in net profits for the October-December quarter compared to the same period last year. While total revenues for these companies expanded at the same pace as in the September quarter, profit growth has materially slipped. More than the demonetisation impact, a spike in raw material costs has contributed to slower profit growth for listed firms.

Going by the early bird results, three factors have muted the impact of the note ban on India Inc’s aggregate performance. One, while domestic consumer-facing businesses such as FMCGs, two-wheelers and print media have seen a dent to sales from the cash crunch, B2C businesses are under-represented in the listed space. Therefore, their poor performance has been made up by industrials. Commodity giants have delivered good numbers due to improved realisations (steel, chemicals) and sectors with sizeable export earnings (software, pharma and textiles) have weathered the quarter well. Two, even in B2C sectors, some product categories have been more resilient than others. Passenger car makers have delivered better sales growth than two-wheeler makers. In FMCGs, beverages and premium products did better than soaps. In some consumer appliances, the note ban has prompted consumers to shift their custom from unbranded to branded players. Three, there are regional disparities too. Urban India, and the southern and eastern States seem to have weathered demonetisation better than rural India or the northern and western States.

However, the fact that the initial numbers from India Inc show limited disruption from the note ban should not be cause for complacency, either for the stock market or for policymakers. For one, it is the larger and better-performing members of India Inc who usually flag off the earnings season; the numbers would need to be watched closely as the season progresses. Two, even if demonetisation hasn’t actually led to a contraction in sales or profits, it is clear that it has pushed back the much-awaited earnings recovery for India Inc. For three years running, stock markets have been rallying on hopes of corporate India getting back to double-digit profit growth, but this is again likely to be foiled in FY17. Most important, it is necessary for policymakers to bear in mind that the listed universe in India represents only a small sliver of entrepreneurial activity. From anecdotal accounts, it appears that unlisted, small and medium enterprises have borne the brunt of the liquidity crunch and loss of demand unleashed by demonetisation. Statistics on SME performance are hard to come by. But demand contraction or job losses in this sector will have significant implications, both for consumer confidence and the state of the economy. Therefore, the Centre must make every effort to gauge the impact of demonetisation on SMEs and address their pain points.

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