Elevated inflation can be a drag on overall economic recovery: Ind-Ra

India Ratings and Research (Ind-Ra) has said that salaried and wages earners will be a drag on overall economic recovery in medium term due to tepid recovery of household consumption.

An environment of pandemic-led uncertainty and elevated inflation can impact the level of spending, and hence the overall demand, it said.

Stable corporate performance amid second Covid wave during 1Q FY22 has raised optimism for a faster-than-expected recovery. However, the pressure on top line has largely been mitigated by a reduction in overhead costs, especially labour cost to maintain a healthy bottom-line.

Ind-Ra's analysis of 2,036 corporates suggests that the number of companies posted losses in 1Q FY22 has been lower than in 1Q FY21. Out of the 2,036 entities, 523 entities posted losses in 1Q FY22 compared to 986 entities in 1Q FY21.

This has largely driven by limited the restriction imposed on business activities. Corporates too have learned and implemented various measures to combat this kind of situation.

Although the overall trend is encouraging, it is not broad based. While the top three buckets have limited number of entities making losses, the last two buckets (501 to 1,000 and 1,001 to 2,036 entities) have 23 per cent and 33 per cent loss-making entities respectively.

This is compared to around 50 per cent entities in both the buckets in 1Q FY21, reflecting the ongoing pressure on smaller entities.

Nonetheless, the overall corporate performance has been reasonably encouraging and can continue to be so with some moderation in margin and cash flows.

While the resilience of corporates is encouraging, said Ind-Ra, the adverse effect of pressure on employee cost is a cause for concern. This could be a result of job-loss or salary cut or both.

Nearly 50 per cent entities out of out of 2,036 corporates had quarterly negative growth in labour costs in 1Q FY22 compared to 4Q FY21.

Although there is some seasonality in employee cost, it is also true 1Q is always a better quarter than 4Q owing to the disbursement of various performance-based payments linked to the previous fiscal.

Ind-Ra said the more alarming fact is that the trend has been on a downward for the last few years, which is visible in the yearly wage growth data in the last three years.

Resuscitating wages will be critical for a revival of overall economy and capex cycle which has been languishing even before the Covid-19 outbreak, it added.