For private sector investments to accelerate, the government must make labour laws less restrictive—something the NDA had promised but hasn’t delivered on.
As if the environment wasn’t already difficult enough with crude oil prices spiking, trade wars escalating and interest rates rising, uncertainty over the general elections is likely to send corporate India further into its shell. Investments by the private sector have stagnated for several years now with just a handful of companies in the telecom and steel sectors spending meaningful amounts on capex. The ratio of the GFCF to GDP has fallen from 30.3% in Q1FY17 to 27.9 in Q4FY17 and has seen a slight improvement at 29.1% in Q4FY18.
While big industrial houses—Birlas, Tatas, Vedanta—have spent substantial sums buying businesses, not too much fresh capacity is being created. Some of it is currently unviable; in the power sector, for instance, nearly 20,000 MW of capacity is stranded without fuel linkages. The other reason why the private sector has been reluctant to invest is because demand hasn’t really picked up to levels that warrant fresh capacity creation. As Sonal Varma, chief economist at Nomura, has pointed out, while capacity utilisation may have picked up in recent times, it remains at sub-optimal levels.
Also, barring some deep-pocketed business houses, most companies remain over-leveraged and are attempting to revive their balance sheets by selling non-core assets. On the other side, banks too have been busy cleaning up their balance sheets and are hesitant to lend to infrastructure projects.
For private sector investments to accelerate, the government must make labour laws less restrictive—something the NDA had promised but hasn’t delivered on. Also, this government has tended to be high-handed; for instance, it has resorted to price controls on pharmaceutical products and made no real efforts to make spectrum less expensive. It also needed to be more decisive on regulations, for instance in the telecom sector. Again, although it promised not to be tax-adversarial, the anti-profiteering authority set up as part of the GST legislation was a sign the government unwilling to let go of controls. In fact, it is only in recent months that there has been some let up in controls.
Announcements from the private sector may have improved in recent months, but as Pranjul Bhandari, economist at HSBC, points out, it only seems to be closing the gap with the five–year average. Moreover, real credit growth to industry is ticking up but only marginally and interest rates are inching up making loans costlier. If the government continues to borrow heavily—as it is likely to continue to do to ensure it spends enough on infrastructure—private sector investments could continue to get crowded out. Off-budget borrowings in the current year are estimated at a sizeable Rs 1.7 lakh crore, up 110% from FY18. With growth slow, the temptation to raise government spending is high, but to the extent that this raises interest rates, it hits private investments.