Rapid govt-spend has brought NHAI to its knees while bad policy has wreaked havoc on genuine investors like Vodafone
The economy is slipping—slipping fast and to levels not imagined. A 5% GDP growth in Q1FY20 and, more pertinently, a 4.9% growth in the GVA tells us the slowdown is far more entrenched than anyone believed. To be sure, some of the damage has been caused by the low inflation, but collapse in the real growth in manufacturing to 0.6% year-on-year (y-o-y) means there is a problem.
Amidst all the debate of structural versus cyclical, what’s worrying is the huge loss in consumer confidence, reflected in the sagging sales of homes, cars and, now, biscuits. Private consumption grew an anaemic 3.1% y-o-y in Q1FY20, on a modest base of 7.3%; that was expected given the lay-offs in industry as businesses scale back—or even close down. Could this get worse? Probably not, but it is unlikely to get much better either.
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To counter the slump, the government must immediately start addressing the structural weaknesses—unfair and complex regulation, poor infrastructure, poor governance, rigid labour laws, unrealistic compensations for land, no deep bond market. And, for this, the government must first decide it wants flexible labour laws that allow companies to hire and fire with ease; so far the changes to the labour laws have been cosmetic.
As for the infrastructure build-out, there are some who say money isn’t the problem; in which case, the question would be, what is? The finances of entities such as NHAI are precarious—Rs 1.8 lakh crore, with twice the amount of contingency liabilities. Also, it used the HAM model, which allowed entrepreneurs to get away with no skin in the game. Today, no concessionaire wants to take on any risk at all.
Those businessmen who took the big risks and invested billions of dollars—Vodafone has brought in more than $7 billion of capital in the last few years as FDI—are today scrounging for cash because their businesses are coming apart. This, for no fault of theirs, but because the government framed the rules against them. Unless all players are treated fairly, corporations can’t be expected to invest.
Indeed, recapitalising banks and injecting liquidity into the system will have limited impact. Without a level-playing field, no businessman would want to risk capital, so deep is the morass in sectors such as power and telecom. Indeed, the NPA cycle seems to be far from over, with lenders staring at defaults from NBFCs, power plants, MSMEs and, maybe, even telcos.
The government’s recapitalisation of state-owned banks is expected to result in some Rs 5 lakh crore of additional loans, and it should result in a pick-up in credit. However, the problem today is not one of supply—banks already have funds to lend. It is that there aren’t enough credit-worthy customers—whether retail or corporate—and, therefore, banks are understandably cautious. Each day, one more company is downgraded, leaving them with fewer lending opportunities. While there is surplus liquidity, this is available only to top-tier borrowers, leaving a large swathe of firms and NBFCs without access to affordable credit. If banks lend to these unreliable borrowers, it will come back to them as NPAs in a couple of years. Having burnt their fingers, private sector lenders are unlikely to grow their corporate books at the pace they did in the last investment cycle; a couple of them lend very little to companies.
Given how the clean-up in the corporate sector is far from over and growth is weakening, they would turn more risk-averse. Also, there is much hope banks will trim loan rates, but that is unlikely because banks can’t drop deposit rate below a point;despite surplus liquidity, credit growth has slowed to 12%—hurt by the softer offtake in services. In any case, low interest rates cannot spur a recovery.
The story is much the same in the retail space. The unfortunate fact is that asset prices—homes and cars—remain elevated whereas affordability is coming down. One way out of the mess in the residential real estate space could be to hand over incomplete projects to established builders—foreign and local—offering them good returns and concessions. That way lakhs of home-buyers will get possession of their property in the next couple of years, catalysing demand for a range of raw materials, goods and services. Else, the bankers stand to lose large sums.
The government’s short-term fixes—clearing GST refunds in 30 days—will help, but these amounts are less than Rs 5,000 crore. Also, with tax collections dull—the destocking in the economy hurts GST—and the ambitious disinvestment target unlikely to be reached, it cannot spend as much as it wants; that will exacerbate the slowdown. Moreover, it is important to manage sentiment—depressed consumers are not good for the economy. Fortunately, the monsoons have recovered, but at the same time, global growth and trade are decelerating, which means the already-wilting exports will wilt further. There aren’t too many options; for a real recovery, reforms are a must. In the near term, some extra spending by government , at the cost of fiscal indiscipline, is needed.