Private consumption & investment are flagging, govt alone can’t revive growth; need a big reforms push for that
The IMF on Tuesday lowered its growth forecast for India in FY20 to 7%. But, given how private sector capex has been sluggish for nearly four years now and consumption demand has slowed sharply over the past year, most economists expect GDP to grow at just 6.7-6.8% or even more slowly. There are, however, no quick-fixes; sustainable growth comes from big, game-changing reforms, not populist measures. Simply lowering interest rates does not mean businesses will start borrowing. The current slowdown must be viewed against the backdrop of the twin-balance sheet crisis, never easy to recover from in the best of times. The revival is all the more difficult because industry is still grappling with GST and the disruption from demonetisation. While consumption demand has held up the economy in the last few years, having fallen off now, it is unlikely to revive meaningfully without investment picking up. The slowdown in consumption spends are being attributed to stagnant or falling farm incomes, the lack of new jobs and large job losses in industry. Spends are also subdued because consumers aren’t seeing any significant rise in their incomes. ACMA said, on Wednesday, ten lakh jobs were in jeopardy in the auto components sector. In fact, the higher surcharge imposed on high net worth individuals could dampen demand for housing, a key sector for the economy, and one that could have catalysed growth.
The government has not increased the allocation for capital expenditure meaningfully, hamstrung as it is by high revenue expenditure and deficits. The FY20 allocation is Rs 3.4 lakh crore, up 12% over FY19, but the total capex, together with PSUs, is smaller than in 2018-19. Also, the government’s share of total capex has been falling over the years and, with several PSUs unable to generate adequate internal accruals, there has been a tendency to resort to extra-budgetary borrowings, which are pressuring their balance sheets. At the end of the day, though, the government’s investment accounts for a relatively small proportion of India’s investment, it is the private sector that needs to invest, and the key to encouraging more private sector investment lies in reforms in the areas of land, labour, regulation, enforcement of contracts, taxation and FDI. It must be recognised that much of the private sector remains over-leveraged and, as the corporate results show, cash flows are weakening. Those industrialists that have the ability to leverage have used this to buy stressed assets via the IBC route. To be sure, routine capex will continue, but given that there is adequate capacity across most sectors, there is no real urgency to create more. Indeed, as R Shankar Raman, CFO at Larsen & Toubro observed, a revival in private sector capex is a good 12-18 months away. As he pointed out, it is as hard to raise money in the capital markets as it is in the debt markets unless companies are highly rated. While the reckless lending by NBFCs needed to be curbed, it has reduced the available liquidity in the system especially for the second- and third-tier borrowers. At the same time, banks have become risk averse, not surprising since the NPA cycle doesn’t seem to have ended yet. Even as it eases regulation for labour and land, the government must worry about credit flow to weaker companies. Without that, a recovery could take years.