Large firms benefited at the cost of smaller, unorganised ones during pandemic

Updated December 12, 2020

social social social social Large firms benefited at the cost of smaller, unorganised ones during pandemic

IANS

New Delhi, Dec 12 (IANS) Large firms benefited in part at the cost of smaller and unorganised firms, and rising inequality is a scar that the Covid-19 pandemic is likely to leave behind, according to financial services house, HSBC.

"This could have happened in two ways. One, there has been a case of demand moving from small firms to large ones. Two, small firms tend to be vendors of large firms and delays in payment or non-payment of bills can hurt," an HSBC report said.

"The rising inequality between large and small firms could also be a driver of the rise in individual-level inequality," the report said.

It added that the corporate results in the quarter ending September were telling. Large listed firms saw a larger rise in profits. A combination of cost cutting, lower interest rate environment, access to buoyant capital markets and formalisation of demand are likely to have helped.

"Sadly, the smaller listed firms did not do as well. And the unlisted informal firms, typically with low economic buffers, are likely to have faced acute economic stress. In fact, it can be argued that large firms benefited in part, at the cost of smaller/unorganised firms," HSBC said.

The report said that most worryingly, small firms are more labour-intensive than large firms. In fact, the informal sector employs around 85 per cent of the labour force. If small firms do poorly, it impacts a large number of people. Data show that small firms have cut staff costs by much more than large firms.

All of this could weigh on demand over time (though there are many channels at play, and the exact impact on growth may not be straight forward).

"We are already seeing early signs (passenger vehicle sales doing better than 2-wheeler sales). Indeed, rising inequality is a scar that the pandemic is likely to leave behind," HSBC said.

According to the report, it may seem at first glance that India got away easy, with growth recovering despite limited fiscal spending. But low fiscal spending could leave behind other scars, like inequality.

The rising inequality between large and small firms could be a driver of individual-level inequality. Large listed firms have seen a robust rise in profits, while smaller listed firms have not done as well. And the unlisted informal firms are likely to have faced acute economic stress.

Small firms are more labour intensive with the informal sector employing around 85 per cent of the labour force. If small/informal firms do poorly, it impacts a large number of people. And limited fiscal support here can stoke inequality.

Rising inequality could have other side-effects, such as inflation. India has had a troubled past with services inflation (recall the 2011-13 period). It could rise again in 2021. As a vaccine comes into play, there could be a wave of pent-up services demand.

Alongside this, as large firms and their employees do relatively well through this period, they are likely to demand more services, stoking services inflation further. Consumption patterns show that the rich tend to consume more services than the poor, it said.

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