Aarati Krishnan

Is there a silver lining in services?

Aarati Krishnan | Updated on May 17, 2019

Services surge: The retail sector has rebounded sharply   -  THE HINDU

While gloomy data points from the industry leg of the economy have hogged the limelight, services seem to be doing better

Lately, high frequency indicators that are believed to capture the ECG graph of the Indian economy have been flat-lining. Some analysts have used these data points on IIP, vehicle and FMCG sales to conclude that domestic consumers are now in dire straits, putting the economy at risk of a cardiac arrest.

But the assessment would be less pessimistic if one looks at the services leg of the economy. Most high-frequency indicators in India are designed to track consumer demand for goods and sales of manufactured products. Yet, industry today chips in with just a fifth of India’s GDP while services is three times as big with a 60 per cent contribution.

Services holding up

Three big-picture data points indicate that services may be holding up better amid the industrial slowdown. One, bank credit to the services sector, according to the RBI, grew at 20 per cent plus year-on-year every month between March 2018 and February 2019, closing FY19 18 per cent higher. In the same months, credit offtake for industry grew at 1 to 6 per cent, rounding off the year at 7 per cent.

Two, while listed industrial firms have delivered poor sales growth in the January-March 2019 quarter at 5 per cent, services firms have grown fast at 16.5 per cent. This is derived from results of 175 NSE-listed services companies and 240 industrial ones that have so far reported their numbers. Services companies have also steadily improved upon their revenue growth in the last five quarters, starting out at 8 per cent in January-March 2018 and doubling the pace since.

Three, consumer price inflation trends for the past two years show the price rise for services such as housing, health, recreation, education and personal care has remained elevated even as goods inflation has collapsed.

While big picture data on services is positive, how did individual segments fare?

Retail rebound

India’s retail sector registered a revival of sorts in FY19 after stalling the previous financial year. Trade analysts put the sector’s growth at 8-10 per cent in FY19, with organised retail growing faster. Listed retail players have clocked a 21 per cent revenue growth in the latest March quarter and value retailer Avenue Supermarts clocked same-store sales growth of 17.8 per cent for FY19, rebounding from 14 per cent in FY18.

If demand for premium mall space is an indicator of the sector’s health, consultant JLL noted that retailers, who absorbed 3.9 million sq ft of mall space in 2018, were looking to double that to 7.7 million sq ft in 2019. But while organised retail seems to be back on its feet, it is difficult to know if the mom-and-pop stores which make up most of the sector are mirroring this rebound.

Hospitality warm-up

Holidaying in exotic spots seems to top the bucket-list of affluent Indians and that’s showing up in demand for hotel rooms consistently outpacing supply in the last five years. Indian Hotels checked out of FY19 on an upbeat note, recording a 10 per cent revenue growth and its highest profit in 11 years. It shared industry data showing that demand for hotel rooms grew by 3.4 per cent in FY19 even as supply expanded 2.6 per cent.

Occupancy rates have climbed from 57 to 65 per cent in five years. Should this sustain, players expect to take hikes in their room rates that they have been putting off for five years now.

Relief for real estate

After battling activist regulators and reluctant buyers between 2013 and 2017, real estate players saw some light at the end of the tunnel in 2018. Knight Frank noted that 2018 was the first calendar year in a decade, in which sales of new homes in key cities increased (they rose by 6 per cent to 2.42 lakh units).

The pick-up helped the industry’s unsold inventory recede from 7.2 lakh units in 2014 to 4.7 lakh in 2018. RBI data reiterates healthy home loan growth at 19 per cent in FY19.

Slowing financial services

Financial services was one of the few sectors to actually get a leg-up from demonetisation, with thev shocker prompting households to quickly reallocate savings from physical to financial assets. Banks, insurers and mutual funds reaped a windfall in inflows between FY16 and FY18. But with the spell wearing off in FY19, bank deposits have registered just a 10 per cent increase, life insurers have collected just 6 per cent more in individual life premiums and mutual funds have seen their net inflow halve compared to FY18. But this doesn’t put these players in particularly difficult straits, as their flows remain well above pre-note ban levels. On the credit front, listed banks saw a 16 per cent growth in the latest March quarter, while many NBFCs braked due to the liquidity crunch.

Communications, transport

India’s telecom players certainly don’t face a demand problem, with their internet customers soaring by 82 per cent between 2015 and 2018 and their data usage jumping from 136 MB to 8.7 GB per month, even though the mobile subscriber base has stagnated. But with competition denting tariffs, revenues of players have dipped in this period, with analysts now expecting a shakeout to rescue profitability.

Consumers also seem to be splurging without a care on other forms of entertainment. Listed players in the multiplex and content space saw a 22 per cent expansion in their takings in the March 2019 quarter, on top of a 26 per cent growth last year. India’s DTH subscriber base has jumped from 56 million to 71 million in the last three years.

Transport is one of the few services to have lost speed lately, with commercial vehicle sales, a proxy for road transport, slowing sharply in the second half of FY19. Air passenger traffic has also seen a drop-off from January moderating FY19 growth to 13 per cent, from 19-20 per cent earlier.

The ‘E’ factor

Online aggregators who have enabled Bharatvasis to buy groceries, hire conveyance, order food, book hotel rooms and call in the beautician at the swipe of a smartphone managed scorching growth rates in the last three years. Redseer Consulting estimates that e-tailing platforms shipped out 2.5 million packages a day in 2018, compared to 1.5 million in 2016. Food-ordering apps have set the cash registers ringing at neighbourhood eateries by clocking gross business volumes of $1700 million in 2018, from $300 million in 2016. Daily rides hailed on online taxi apps have jumped from 2 million to 3.5 million.

But some of these bullish data points need to be read with caveats. One, while most of the above metrics capture growth for corporate services firms, well over half of India’s services economy is made up of informal mom-and-pop outfits on whom there is precious little information. Two, a lot of the services growth seems to be powered by the creamy layer of India’s population. For more inclusive services such as telecom, loss-leader pricing has played a big role in driving demand, suggesting that the growth could peter out if the economy doesn’t deliver income increases.

Collecting more data on the informal sector and designing a monthly index on services, like the IIP, can help ensure that commentators on the Indian economy, like the seven blind men, don’t have to guess at the shape of this elephant by feeling its trunk.

Published on May 16, 2019

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