BackComplete turnaround by Indian companies still a distant dream
Meaningful pick-up in capex cycle critically hinges on visible improvement in demand conditions
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Even as the consumer price index (CPI) inflation fell to an eight-month low and Index of Industrial Production (IIP) recorded a modest sequential growth in June, a complete turnaround in the Indian corporate investment cycle is still a long way. Dun and Bradstreet, in its report, Economy Observer, said that this remains the single-biggest challenge confronting the economy.
IIP recorded a modest sequential growth of 3.8% in June from a revised 2.5% in May. CPI inflation declined to an eight month low of 3.8% year-on-year (y-o-y). Car sales rose by a robust 17.5% in July, marking the ninth consecutive monthly increase.
The process of applying for environment and forests clearances has been made online and state governments have been given greater powers to grant environmental clearances for certain industries. In 2015, (till June), 81 infrastructure and construction sector projects have been given green nod.
Despite these developments, it is a long way away from a complete turnaround in the Indian corporate investment cycle. The on-going unclogging of projects will indubitably provide a moderate push to investment, but the meaningful pick-up in the capital expenditure (capex) cycle critically hinges on visible improvement in demand conditions.
The fact that capacity utilisation is floundering in sectors such as capital goods and metals, is testimony to weak demand environment. Demand slowdown has especially affected consumption-driven sectors such as consumer durables, fast moving consumer goods (FMCG), and so on. The turnaround in output of consumer durables in the IIP data is due to favourable base effect and owes no relevance to revival in consumer demand. Lower food and fuel prices are likely to provide a fillip to private consumption in the forthcoming quarters.
However, extant capacities in most sectors are more than sufficient to satisfy emerging demand and therefore, it is unlikely that the private consumption growth would result in a broad-based pick-up in the capex cycle. This explains the reluctance displayed by the corporate sector in undertaking fresh investments. The Chinese yuan’s devaluation has added to the woes; the sudden move on the part of China to devalue its currency would impact the competitiveness of Indian exports, which are already witnessing sluggish growth due to recessionary conditions in markets.
The clamour for reduction in interest rate has only intensified in view of the prevailing macro-economic conditions. During the third bi-monthly monetary policy announcement, the Reserve Bank of India (RBI) kept the repo rate unchanged at 7.25%.
Lower interest rate can effectively bring about a turnaround in investment and hence growth. The goods and services tax (GST) and land acquisition bills are critical to revive long-term growth prospects. The growing dissonance between the ruling National Democratic Alliance (NDA) led government and the opposition does not inspire much confidence in meeting the April 2016 deadline for GST.
In the banking sector, the aggregate deposit and bank credit grew by 11.8% (y-o-y) and 9.4% (y-o-y), respectively in the week ended 24 Jul, as against a growth of 12.5% and 12.8% in the year-ago period.
For the banking sector, the government plans to inject 70,000 in next four years to support public sector banks.
Edited excerpts from Dun and Bradstreet’s report, Economic Observer.
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