The Budget for 2023-24 should unveil a scheme to make lower-rated corporate bonds viable and announce steps to relax labour laws to enable firms to set up new manufacturing units under production-linked incentive (PLI) schemes, analysts said. Incentives for sates to undertake urban governance reforms can lead to a boom in the real estate sector as well.
While the Centre will keep its capex momentum, analysts reckon that private investment will hinge on resolving these issues, along with easier land availability for industrial purposes.
“The government should create a fund to give first-loss guarantee to low investment grade corporate bonds (rated A and BBB). This will catalyse private investment in the economy,” Ajit Pai, Strategy Lead Partner, Government and Public Sector, EY India, said.
The costs for the scheme for three to five years won’t be much given that higher economic growth would lead to lower defaults, he said.
While AAA and AA-rated bond yields are around 8%, for A and BBB-rated, it could be 12-13%.
So, most of the corporates rely on bank loans, which worked out cheaper at around 9-10%.
The government guarantee could enable lower investment-grade corporates to borrow at the same rates as AAA or AA-rated firms.
India does not have a deep corporate bond market, and large investors, including insurers and pension funds, have mandates to invest only in highly rated papers.
As a result, 95% of the bond issuances in India are in the AAA and AA rating categories while it is less than 5% in US and globally less than 35%.
“Companies moving to the corporate bond market will also create more space for bank lending to the MSMEs,” Pai added.
Such a bond guarantee will also act as a booster shot for the Rs 111 trillion National Infrastructure Pipeline with identified projects including brownfield projects during FY21-FY25.
While the Centre (39%) and the states (40%) are expected to have an almost equal share in implementing the infrastructure pipeline, the private sector was expected to account for 21%.
The Reserve Bank of India
Analysts reckon that cost of funds is a major stumbling block in taking advantage of the Rs 1.97 trillion incentives announced under PLIs for 14 sectors in the past two years.
However, these have not taken off in most sectors except to some extent in mobiles, electronics and textiles. Yet, the government might announce more PLIs in the budget in areas such as speciality chemicals and electrolysers.
According to Bank of Baroda
“The government can also consider SME parks which foster growth of SMEs in a cluster where there are tax breaks and provision of infrastructure which finally gets linked to exports,” Sabnavis said.
Among other suggestions, Sabnavis said the government should bring in an investment allowance which allows offsets from profit before tax (PBT) if invested in the next 365 days in capital assets.
One of the key impediments in firms going for Greenfield projects or expansion of brownfield projects is the labour laws.
Even though the government has subsumed 44 labour laws into four Codes to improve the ease of doing business and attract investment for spurring growth, these have not yet been notified.
The Labour Code on Industrial Relations will allow firms employing up to 300 people — against 100 now — to retrench/lay off workers and/or shut shop without government approval. Due to stringent labour laws, textile and apparel factories in India on average employ 40-60 people in a unit compared with 2,000 in Bangladesh and thereby losing the market space to the neighbouring country.
“PLI schemes are likely to help the country in achieving the goal of manufacturing, employment, investment and localisation. A single portal for PLI schemes with standard processes across various schemes is likely to help the industry and the government to monitor the effectiveness of these schemes,” Saurabh Agarwal, Tax Partner, EY India, said.
A majority of the companies had opted for a “wait and watch” approach during the first half (H1) of this fiscal on low capacity-utilisation and largely uncertain business environment.
The average capacity utilisation in manufacturing is over 70% and reflects a sustained economic activity in the sector, while the growth momentum is likely to sustain for another 6-9 months, according to a Ficci report.
India Ratings chief economist DK Pant said demand stability is a pre-condition for investment revival. “While the PFCE has breached the pre-Covid level, sustained growth of it and exports growth will have larger bearing on investment demand,” Pant said.
The upswing in public sector capex led by the Centre in the past few years is likely to be sustained next year as well, albeit at a slower growth rate due to the government’s desire to trim bloated fiscal deficit (from FY23BE of 6.4% to around 5.5-5.8% in FY24).
A lower deficit would create space for the private sector to borrow more funds from the market.
The Modi Government is clearly in favour of decreasing the revenue expenditure while maintaining the requisite expenditure for subsidies and schemes for the poor, farmers, scheduled castes and tribes, Sandeep Vempati, Economist and Joint Convenor of Telangana BJP
The capital expenditure increased from 12.31% of total expenditure in FY18 to 19% in FY23 while the revenue expenditure decreased from 87.69% to 81% for the above-referenced period, he said.
“The expenditure for Budget for 2023-24 could be Rs 45 trillion (up 7.3% over likely FY23RE of Rs 41.95 trillion) with revenue expenditure as Rs 35 trillion and capital expenditure as Rs 10 trillion (from Rs 7.5 trillion in FY23). The share of revenue and capital expenditure would be 77.78% to 22.22%,” Vempati said.
The gross fixed capital formation (investment) to GDP ratio increased to 34.6% in Q2 FY23 from 33.4% in Q2 FY22 owing to a strong capital expenditure push by the central government, state governments, CPSEs and bodies like NHAI and the railways. The public capex (Centre, states and CPSEs) has increased by over 50% in five years through FY23 as the government has been banking all these years to push economic growth in the absence of strong private capex.
Besides, the `6 trillion brownfield asset monetisation under the National Monetisation Pipeline in four years through FY25, a senior official said the Centre should also accelerate the monetisation of land by the defence, railways, salt commissioner, CPSEs and other central government agencies to make available lakhs of acres of land for public and private sector projects.
Similarly, the government should offer more incentives to states to carry out urban sector reforms such as allowing higher FSI (Floor Space Index) limits to revitalize the real estate sector.