A fragile uptick

General Studies Paper 3

 Context

• Over the past few weeks, several firms have released their financial results for the first quarter (April-June) of the ongoing financial year. These results provide information of how various sectors have fared during this period

New trends which reflect current economic situation

• On closer examination of available data. It was observed that
• some firms have observed a slight pick-up in demand in the consumer non-durables segment in rural areas.
• And two, the smaller firms in the FMCG sector are witnessing a strong resurgence.
• These nascent trends, however, rest on fragile foundations, they do point towards an improvement at both the consumption and production ends of the spectrum.

Smaller firms are growing at a faster pace than larger ones

• As per reports, the smaller local players are seeing much faster volume growth than the larger national brands. This holds true across segments and regions.
• Considering that the smaller firms have faced a series of crushing blows over the past few years from demonetisation to GST to the funding squeeze after the NBFC crisis to the pandemic — these are encouraging signs for the larger MSME universe.

Challenges face by small firms (MSME)

• Unlike the larger firms, these smaller firms, especially those in the informal sector, are less equipped to deal with such shocks because of limited internal resources.
• They also have less access to formal sources of finance.
• And as policy support typically tends to flow through formal monetary channels, this leaves them more vulnerable
• However, data now seems to suggest that these smaller firms are expected to grow again as
• moderation in inflation, is observed. This would impact MSME production these units are less able to absorb high input/commodity prices, as well as household consumption, by increasing their spending capacity.
• Another possible factor is the easing of logistical constraints. This would impact both production (inputs need to be moved) and end sales (via distribution).

Challenges related to credit flow within the economy.

• The flow of credit to the broader economy had begun to decline even before the pandemic. In fact, it started with the NBFC crisis — the collapse of IL&FS and the subsequent implosion of DHFL
• There are several channels through which money flows into the broader economy banks, NBFCs, and cooperatives.
• Data shows that growth in bank credit to the commercial sector through various avenues (non-food bank credit, investments in commercial paper, shares, bonds/debentures) began to slow down in 2019, averaging in single digits in the three years ending March 2022
• A similar deceleration can be seen in loans and advances by NBFC and urban cooperative banks. However, credit flow picked up thereafter, even as interest rates rose
• Despite this uptick, however, loans outstanding as a percentage of GDP are lower than the pre-NBFC crisis levels. As finance greases the workings of an economy for instance, the economic cycle as seen through the ups and downs in sales of two-wheelers and commercial vehicles is closely aligned with the credit cycle

Economic momentum is likely to slow down over the coming quarters.

• Some NBFCs are already turning cautious seeing risk in some forms of retail lending. This may limit credit flow.
• Moreover, these trends may also not be reflective of the economic circumstances of large sections. After all, real wage growth remains stagnant.
• And more individuals are availing work under MGNREGA indicating labour market slack. Though it is possible that improvements in the job market are seen with a lag.

Conclusion

• There are expectations that a good monsoon in large parts of the country will help revive rural demand, injecting vibrancy into the broader economy. Along with, an increase in the income support that is extended to farmers through PM-Kisan could be a trigger for a broader revival or rural demand.