Jobs, land prices, Covid-19 vaccine, rural India, household savings, NBFCs, banks, consumption, capex - Positives and Negatives | EXPLAINED

Even as job growth remains weaker than it was pre-pandemic, JM Financial sees the outlook on consumption strengthening. Notably, land prices are exhibiting momentum after almost 5 years accompanied by a 2-year high growth in currency in circulation. While the sustainability of this rise, and the consequent wealth effect and inflation trigger remains a key monitorable, other consumption drivers too appear favourable.

These include: Covid-19 vaccine, rural India, household savings, NBFCs, banks, consumption: 

i) progress on the Covid-19 vaccine
ii) a steady economy in rural India (although with lower government support YoY)
iii) a pandemic-driven rise in household savings
iv) NBFCs / banks better financing abilities for debt-driven consumption.

JM Financial also observes improved capex prospects after a near-decade of a falling capex-to-GDP ratio and low capacity utilisation levels. 

India could see the initial phase of a capex cycle in 2021, led by:

i) oil & gas as well as steel
ii) The recent revival in residential real estate activity, aided by government reforms and capex (PLI scheme/ Rs 100 trn infrastructure).

JM Financial estimated inflation to average at above-comfortable levels of 5% in FY22, which could end the rate cut cycle by mid-2021; however, the RBI’s accommodative stance could prevail through most of 2021. For now, India’s external front remains secure on accommodative policies globally, mass vaccination drives and domestic manufacturing/export policy boosts.

JM Financial overall recovery thesis could however be stalled by:

i) a delay in mass vaccination
ii) a lag in implementation of government reforms
iii) external shocks such as geopolitical tensions and premature withdrawal of supportive policies

Consumption outlook improving:

Despite the weak job scenario, JM Financial outlook on consumption is robust. JM FInancial noted an uptick in land prices for the 1st time in nearly 5 years, along with a 2-year high growth in cash in circulation. If this sustains, the consequent wealth effect bodes well for the overall economy, while also acting as a trigger to inflation. The lower take-home salary under the new labour code however remains a downside risk.

Fiscal and monetary policy to remain supportive:

The RBI is expected to retain its accommodative stance for most of 2021 and manage the excess liquidity in a timely manner once credit demand picks up.