A new phase of structural adjustments prompted by Bullwhip
The latest data on the 2020-21 Q4 GDP shows a growth of 1.6 per cent over 2019-20 Q4, which in absolute numbers looks like Rs 38.96 lakh crore, as against Rs 38.33 lakh crore in Q4 of 2019-20. If anyone wants to see this in dollar terms, the dollar made a steep fall against the Rupee (Rs 75 v/s Rs 72.5) over this period, thus making the growth look like 5 per cent instead of 1.6 per cent. Despite these aberrations, the Indian economy weathered a major storm last year and both Q3 (0.5 per cent) and Q4 (1.6 per cent) have been two quarters of growth thus signaling a “coming out” from the technical recession that was caused in Q1 and Q2 of 2020-21.
The drivers of growth however have shifted majorly in Q4, if one sees the sectorial data, the biggest unit of rise came from the government consumption expenditure increase of 28.3 per cent in the same period over last year. If we start with gross value added (GVA) growth (GDP growth minus product taxes), the manufacturing sector accelerated to 6.9 per cent in the fourth quarter of 2020-21 compared to a contraction of 4.2 per cent a year ago and construction grew by 14.5 per cent against 0.7 per cent, while both agricultural growth (down 3.1 per cent from 6.8 per cent) and hospitality and transport (down -2.3 per cent from 5.7 per cent) showed markedly lower numbers. We must keep in mind that only a week was lost in production activity in the corresponding quarter of last year, due to lockdowns, thus the two periods in terms of economic flow are not out of whack in comparison.
The crucial question is what we now expect the economy to perform, given that 66 per cent of the time in Q1 2021-22 is mired in semi-lockdowns, the informal sector is impacted heavily and working capital is locked in unforeseen inventories of all kind and debt moratoriums are being requested for another extended period of time over the previously allowed one. The question cannot be about comparing period numbers alone. Last year’s similar period was worse off with national lockdowns and the expectation at the start of the quarter was to achieve 22 per cent growth over that quarter. This looks a tall ask given the current state of the economic activities.
Let us move to some other dampening factor, perhaps more ominous than the stalling of economic activities through lockdowns. It is the rising commodity prices, which has seen no calming effects, either from the government or trade interventions, left to its own, the prices have spiraled into an orbit; many are calling this a precursor to the super cycle for commodities.
I am however of the view that the rise in global commodity prices, which finally impact every citizen of every country, were actually fueled by rising international logistics cost, global shipping to start with and followed by the inland full truckload freight costs, which later spilled over to every aspect of commodity prices.
The global barometer of logistics costs, the Baltic Dry Index stands at 2750 today, compared to 400 at the start of the crisis and the Shanghai containerised freight index stands at 3500 against 1000 at the start of the crisis last year. These numbers portray how many times the shipping costs have soared to move commodities from oil, coal, pet coke, to agricultural commodities to intermediate products to finally finished goods. The dollar weakness in the same period did adjust in some normative ways to counteract, but it is nowhere close to fully compensate for the deluge.
Every household item has moved several notches up in terms of prices, if they have not then sellers are simply absorbing the brunt of the increase from the input side.
This is what I call the supply side structural shift that every economy has to weather for the next several quarters. It all started with a shipping disruption, where vessels were stranded in high seas, which later moved to ports in form of congestion and then later impacted loading and unloading of vessels as people were not available. The final nail was the concentration of big five shipping lines that shared space among their carriers thus making the supply side even more tight, thus raising prices.
The structural shift needs to be seen from the point of what supply chains grapple with, the Whiplash effect, or the more commonly known Bullwhip effect. This essentially means that in a multi-echelon supply chain, for a small change in supply or demand conditions at the downstream part of the chain could translate to a much bigger change in the supply or demand conditions at the upstream part of the chain.
For an economy as diverse as India, with several supply chains crisscrossing each other, the disruptions in supply conditions in one part of the chain moves up or down the chain in varying degree of ripple effects, that are caused due to asymmetry of information, error propagation, ship-set mismatches and a host of financial woes travelling in multiple directions, working capital, inventory and cash flows being the key ones.
The supply chains in India have to adjust in these conditions and create new rules so that they are able to reconfigure their outputs and flows such that the new varying degrees of demand can be matched with varying supply conditions under constraints. This is the task that will be able to respond to price conditions better, something that will determine the next phase of GDP growth, not only for India, but for the globally connected markets as well.
ABOUT THE AUTHOR:
Procyon Mukherjee is an ex-Chief Procurement Officer at LafargeHolcim India.