Crisil projects a year for private investment to return
A year ago, the term ‘Modified Expectations’—the title of Crisil’s assessment of the government and economy in the first year of the Modi government—meant people had begun to revise upwards their growth forecasts. Unfortunately, despite a windfall gain from falling oil and other commodity prices, the government’s efforts to kick-start growth has only been partially successful, which is why Crisil is calling for tempering expectations of a quick turnaround, or ‘modified expectations’. What is adding to the stress is the weather; unseasonal rains, earlier this year, on the back of a sub-normal monsoon last year, have damaged the crop resulting in distress in the farm sector and the possibility of more to come should the monsoon be deficient as per the Met’s first forecast.
Crisil’s prognosis is that while the Modi government is doing enough to address policy paralysis, by fast-tracking decision-making and enhancing the ease of doing business, these aren’t sufficient to push up demand in the short-term. While pump-priming is a usual solution in such a situation, Crisil points out that this is not possible with the fiscal discipline being observed and, thanks to a hawkish central bank, rate cut-driven consumption is not too much of a possibility either. Programmes like Make-in-India, intended to boost manufacturing and absorb the large numbers entering the workforce each year, will take a long time to have an effect. Unlike standard macro-projections, Crisil also uses results from its credit-ratings database and stresses on the very poor quality of corporate balance-sheets that prevent a step-up in private investment for at least another year—it is the fall in private corporate investment, primarily, that is responsible for the fall in overall investment levels. One big reason for this is that given there is so much surplus capacity and visibility on demand is poor—capacity utilisation in cement is just 71% and 63% in the case of automobiles; of 411 companies analysed by Crisil in the CNX500, nearly 70% underperformed even nominal GDP growth in the first 9 months of FY15 due to lack of demand. Crisil points out that the value of debt downgraded continues to outstrip that being upgraded; and the heavy burden of debt will continue to constrain companies from investing.
The silver lining is that the slight uptick in consumer demand could well sustain, thanks to an increase of R1.4 lakh crore in spending power with households in the current year, resulting from lower fuel prices, benign food inflation and growing incomes—Crisil has extrapolated the savings number from the average inflation levels over the past few years in fuel and food. Crisil reckons the money might be spent on discretionary items, if consumers are confident of the economy getting stronger—in any case, it argues, the returns on savings aren’t that high. Given the low 1.1% agriculture growth in FY15, Crisil’s view is a normal monsoon will give a boost to agriculture in FY16, and that will take GDP up to 7.9% in FY16 as compared to 7.4% in FY15. If the monsoon is deficient, FY16 growth will be the same as in FY15. Even when Modi won the elections, it was always clear cleaning up the UPA’s mess would take a few years. But if banks and India Inc are not able to clean up their balance-sheets in the next year—and that depends upon how the debt tribunals work and if banks are able to pressure firms to sell assets to retire debt—it is not certain private corporate investment will revive significantly in FY17 either. The Modi government, as Crisil says, has identified the major issues correctly, but will have to do a lot more than it has so far.