First quarter financial results: A fragile uptick

Equally significant is the indication that smaller firms are growing at a faster pace than larger ones. One such observation comes from HUL. As per the company, the smaller players in the tea and detergent bar segments are growing at 1.6 to three times faster than the larger players. As per reports, a more detailed analysis by research agency Kantar also shows that 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. 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. This had allowed the larger corporate sector to capture a bigger share of the market. The data now seems to suggest that these smaller firms are clawing back the market space they had previously ceded.

Several factors could have triggered these changes. For one, the moderation in inflation, the easing of commodity prices, is likely to have played a role. 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. Some households would have also witnessed improvement in farm and non-farm incomes — though to what extent is not very clear. Another possible factor is the easing of logistical constraints. This would impact both production (inputs need to be moved) and end sales (via distribution). Data from SIAM shows that sales of commercial vehicles grew at 34 per cent in 2022-23. Equally significant is the pick-up in credit.

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. Some have linked the slowdown in the economy before the pandemic — GDP growth fell from 7.5 per cent in the first quarter of 2018-19 to 2.9 per cent in the fourth quarter of 2019-20 — to this decline in the flow of funds as it would have affected both consumption demand (via retail loans) and production (via working capital and term loans).

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. In fact, some segments within the NBFC loan book have grown at a significantly faster pace than nominal GDP growth. 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 — how credit flows to the broader economy will influence the recovery.

This could, however, turn out to be a false dawn as these trends may not be sustainable for several reasons. For one, the interest rate hikes are working their way through the system, and the 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 muted. 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.

There are expectations that a good monsoon in large parts of the country will help revive rural demand, injecting vibrancy into the broader economy. However, considering the stress that household/MSME balance sheets have been under and the limited options for more productive forms of employment, one good season, while being supportive, is unlikely to be enough. Perhaps an increase in the income support that is extended to farmers through PM-Kisan could be a trigger for a broader revival.