That advance payments made by large companies and banks in Mumbai have seen an increase of just 2% doesn’t come as a surprise. Corporate earnings for the June quarter showed that a small clutch of companies apart, most turned in very ordinary results, many still reeling from the lagged effects of demonetisation or pre-GST de-stocking. In several product categories such as commercial vehicles, demand was weak while in others such as telecom, the competition was fierce. Infrastructure bottlenecks plagued other segments of the economy while global headwinds slowed down profits of IT players. Banks, for their part, continue to be burdened by loan losses even as business remained dull. The rollout of the GST has exacerbated the problem and, consequently, the corporate sector will find it hard to grow profits this year. Indeed, the subdued GDP growth of just 5.7% y-o-y in the June quarter made it clear the economy is fast losing momentum.
The fact is it is not much easier to do business today than it was a few years back, and policies need to be re-framed to encourage investments. Labour laws remain rigid, unfriendly regulations in sectors such as telecom have debilitated incumbents while infrastructure bottlenecks like those in the power transmission segment continue to hamper manufacturing. Studies have shown, for instance, that 50% of the weakness in exports relates to domestic bottlenecks. While the economy has been hobbled by the twin balance-sheet problem and a weak global economy, the government must take more initiatives to make the business environment more conducive. Even as it spends more on programmes like MGNREGA and also on railway and road projects, investment-friendly policies in sectors such as multi-brand retail, where jobs can be created in large numbers, are missing. Allowing 100% FDI in multi-brand retail and giving foreign retailers a free hand would go a long way in creating jobs. This is evident from the large number of jobs created in e-tail already. The sector to focus on is real estate since it has the maximum multiplier effect and also creates a large number of jobs. The eight-point plan announced to spur PPPs is a good move and, combined with a concerted effort to get stuck projects going by cracking down on errant corporate builders, could drive down prices; lower asset prices at reasonable interest rates could help revive demand. Again, freeing up restrictions on FDI in real estate too would be a way to attract big-ticket investments.
The finance minister has mentioned some fiscal stimulus and incremental spends of Rs 50,000 crore are being talked about. Recapitalising banks to a bigger extent than earlier envisaged also appears to be on the agenda. While the additional infusion will bolster banks’ balance sheets, it cannot create demand. The private sector remains unwilling to invest at a time when there is adequate capacity and even if interest rates fall, most companies lack the financial wherewithal to invest—a sizeable rate cut, if RBI agrees, though is critical since it will do a lot to ease India Inc’s stress, and will also raise capacity utilisation and weaken the rupee which will also help exports. Some pump priming is a good idea, especially when directed to job-creating areas like irrigation, rural and urban roads and railways. Higher government-spends will raise yields but if this is accompanied by freeing space for more FPI in bonds, this will keep interest rates under check.