Demand is back, but rising costs could spoil the revival party

#demand recovery, #economic growth, #economic recovery, #Economy, #GDP growth, #inflation, #opinion, gross domestic product (GDP), Wholesale inflation

As COVID-19’s deadly second wave wanes, hopes have again sprung anew among businesses about a sustained rebound. Employees are slowly returning to work, purchase enquiries of goods are trickling in, and unsold stocks are beginning to move out of warehouses. The goal now is to accelerate this, and push the pace to higher levels.

But here’s a catch. The path profitability is a function of both earnings and the costs. The latest gross domestic product (GDP) data for the first quarter show that private consumption expenditure was gathering pace.

Expanding private consumption expenditure would imply that goods are moving out of shop shelves to homes with greater rapidity. This should stand as a happy augury for businesses. Higher demand for goods should translate into higher sales for businesses, resulting in better top lines, the fuel that keeps the companies’ engines chugging.

To describe the last 18 months as a period of momentous change in the way enterprises carry out their businesses could perhaps, eventually, turn out to be an understatement.

Cash burn is the pace at which a company spends the money that is available to it, when it is not making more money than it spends. In a pandemic-hit world, containing this rate was critical to stay afloat. The easier way to deal with this would have been to shut down operations. But the challenge was to keep the company’s wheels running, albeit at a slower place, but at lower costs.

This is particularly true of India’s estimated 60 million micro, small and medium businesses (or MSMEs) that have revealed extraordinary ability in embracing new technologies and hastening the process towards digitisation.

As the pandemic struck, the first response for most MSMEs had been to apply the handbrakes to reduce cash burn, and reset the cost structure, including renegotiation of rents and contracts, rebalancing of senior team salary costs, and plugging all discretionary spends.

A large number of MSMEs let go of their offices or at least reduced the size of their office premises as they adapted to the work-from-home model. This increased their nimbleness, widened access to talent pools, and opened up new business models in the post-pandemic era.

Companies cut down on non-essential expenses. More importantly, however, they looked towards, and adopted, newer ways to lower expenses by seeking to solve the same problem by cheaper tech-driven solutions.

While such cost cuts helped companies tide over the devastating phase, the expense graph has begun rising again, threatening to erode their price competitiveness.

A recent survey by trade body Federation of Indian Chambers of Commerce and Industry (FICCI) has flagged these aptly.

“(The) Cost of doing business remains a cause for concern for the sector. High raw material prices, high cost of finance, uncertainty of demand, shortage of skilled labour and working capital, high logistics cost, low domestic and global demand due to imposition of lockdown across all countries to contain spread of coronavirus, excess capacities due to high volume of cheap imports into India, unstable market, high power tariff, are some of the major constraints which are affecting expansion plans of the respondents”, said the FICCI quarterly survey on Indian manufacturing sector.

These rising cost is also showing up in the official price data. During the first five months of the current fiscal (April to August), India’s wholesale price index (WPI)-based inflation has remained persistently higher than 10 percent.

During these five months, the monthly WPI stood at an average of 11.69 percent, underlining the worry line on the inflation numbers. Wholesale inflation, which is a kind of the Indian version of a producers’ price index, stood at 11.39 percent in August, a sign that doing business has got sharply costlier for a variety of reasons over the last year.

Businesses are looking expectantly towards the coming festive season-buying to bring them closer to pre-COVID-19 levels of sales volume. Escalating costs, however, can potentially play party pooper.

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