The resounding victory of a single party in the general election of the country has immediately boosted up the business sentiments and reflected in the annals of Sensex (one primary barometer) crossing the 40,000 mark.

For economy’s revival and providing impetus to the industrial sector, it is imperative that business community looks at the scenario as suitable for consolidation, growth and fulfilment of medium-term expectations.
Private corporate investment has not been increasing in the past few years and has continued as a weak link in the GDP growth.

Despite the fact that a large part of it depends on the prevalent business sentiments, the ease of liquidity for carrying out the normal business operations had also played a crucial role.

The non-food credit flow witnessed a 12.3% growth in March 2019, against 8.4% in March 2018. Total non-food credit flow to the industry went up 6.9% in March 2019 as opposed to a dismal 0.7% in March 2018, while for the micro and small industries, flow of credit had dropped 7.1% in March 2019, against 10.5% growth in the year-ago period.

Data on credit flows indicate that credit for housing sector had an impressive growth of 15.2% in March 2019, against just a 2% growth in the previous March. This also holds true for personal loans for housing, however, the loans for vehicle purchases have shown a significant drop to 6.5% in March 2019, against 11.3% growth seen in March 2018. This explains the lower growth rate in vehicle sales in the automobile sector.

The credit flow by lending banks hinges on the amount of bad loans incurred by commercial banks that has adversely affected their capability to extend credit after taking precautions of avoiding the possibility of turning these loans into non-performing assets. In addition, non-banking finance companies are entrusted with the job of being regular outlets for lending to businesses.

It is safe to conclude that political stability lends credibility to the effective implementation of economic policies of the government in monetary, fiscal and trade-related areas. This also reduce uncertainties and positively impact the business sentiment.

Past studies have established a close linkage between the rising manner of uncertainty and the decline in economic growth. Hence, the impact on PMI in manufacturing and service sectors for the month of June 2019 is likely to be strongly positive.

Under this scenario, the declining industrial growth needs a careful analysis. The index of industrial production (IIP) that reached 4.6% in FY17 has since come down to 3.5% in FY19. A poor growth in manufacturing (3.6% in FY19 from the high of 4.6% in FY18) has contributed to this decline in IIP.

Under manufacturing, the segments that had performed well in the last year are manufacture of vessels/trailers (7.2% growth) and manufacture of other transport (8.8% growth), while the manufacturing of furniture and fabricated metals had witnessed a falling trend in output growth during FY19. Under usage-based classification of industrial data, it is seen that infrastructure/ construction segment that has grown 7.5% in FY19 signifying a rise in first article inspection (FAI) in infrastructure as a percentage of GDP. The capital goods segment went up by a mere 2.8% in FY 19 and the consumer durables segment saw a 5.3% growth last year.
The factors influencing the demand of these segments include rise in infrastructure and construction activities in the country that is primarily investment-oriented.

The investment needs of some of the mega projects already announced in the past few years — Sagarmala, Bharatmala, Smart Cities, Affordable Housing and Housing for All, civil aviation, irrigation, ports, urban infrastructure — are enormous. For the execution of some projects, private-public participation mode is called for under various bidding processes. Thus, as public investment in this sector act as a major driver, a lot depends on private corporate investment to complete the projects, major or minor.

The assurance of a reasonable return on investment (RoI) at the end of a stipulated period provides the much-needed confidence and certainty of businesses to come forward and invest. The short term liquidity flow in the economy needs to match the rise in business sentiment.

The gross fixed capital formation in GDP, a proxy for investment, has been on the rise, although the effective rise is slow and must be speeded up along with a rise in credit flow by commercial banks. Like business sentiments account for private corporate sector investment, the sentiment in the household sector determines their penchant for credit for housing, purchase of vehicles and household appliances.
India would be facing the critical destabilising factor of trade war between the US and China, and steel and a few other sectors may witness a jump of import arrivals in FY20 from the diverted exports from the US in steel and aluminium. This may gradually engulf a whole gamut of other metals, minerals, agriculture, petroleum products and others.

A close monitoring is needed on trend of imports. The capacity creation in the economy must be enhanced through the increase in investment, led by public investment. Eventually, improvement in business sentiment would follow suit.

The writer is DG, Institute of Steel Development & Growth

(Views expressed are personal)