It’s quite logical that in their pre-budget consultation with finance minister Arun Jaitley on Wednesday, why the industry made a strong case for increase in public spending on infrastructure to prop up demand.
The simple reason is that is the only way to expedite the economic recovery, especially when other parallel funding sources — private sector investments, bank credit — are languishing and pessimism is mounting all over on actual economic recovery.
Certain economic indicators indeed paint weaker economic growth in the second half of fiscal year 2016.
Rating agency, Crisil, in a note on Tuesday, has forecast that corporate earnings to grow by mere 2 percent in the three months ending December compared with 5 percent in the corresponding period in the previous fiscal year.
The reason, the agency cites, include plunging commodity prices coupled with weak investments in the economy.
In a separate note, StanChart said investments scenario, though showed some pick-up in the third quarter, is set to fall in the fourth quarter. "We expect investment to slow in Q4, as private sector investment on the same scale is unlikely and the government is likely to trim capex to meet its fiscal year 16 fiscal deficit target,” StanChart economists said. More worryingly, they warn stalled projects to increase for the second consecutive quarter.
The short point is Jaitley shouldn’t repeat P Chidambaram’s mistake on solely focusing on the fiscal deficit numbers but pump in more funds to public infrastructure, which will, in turn, create activity in all allied segments. The stage is set for a demand-driven recovery in Indian economy when the government implements 7th pay commission proposals possibly by mid this year.
But, this should be aided by aggressive spending in infrastructure. For now, the economic recovery picture is grim and industries too have become impatient.
“The economy is not doing as good as it was expected and the pace of reforms has slowed down," industry body CII's President Sumit Mazumder told an interview with PTI.
"It (the economy) should have done a lot better. It can do a lot better. A reform like the GST would give the whole industry such a psychological boost that you would see a rapid pick up in the economy," said Mazumder.
Most economists have remained skeptical about the sustainability of economic recovery as often projected by the government.
There have been mixed, sometimes, confusing signals from different macro economic indicators that do not go well with the GDP growth. The persisting stress in the economy would make it necessary for the government to continue to push spending in the economy, even if it means the finance minister overshoots his 3.9 percent fiscal target for the fiscal year and 3.5 percent in the next year.
The failure to pass the crucial Goods and Services Tax (GST) in the winter session has undoubtedly come as a big disappointment for everyone. The World Bank, in its recent global economic outlook, has warned that a failure to pass GST could hamper the government’s ability to ramp up spending on infrastructure needs and preserve the status quo of fragmented domestic markets.
There are a few reasons why experts are pessimistic about the current course of economy:
For one, there is tremendous stress among corporations. Most companies, especially infrastructure firms, are highly overleveraged and absence of a demand-led recovery is hurting their cash flows badly. Already, large corporations constitute majority of the bad loans of banks.
According to the Reserve Bank of India’s (RBI) recent financial stability report, there has been a significant increase in the Gross Non-Performing Assets (GNPAs) ratios of large borrowers among state-run banks from 6.1 percent in March 2015 to 8.1 percent in September 2015, leading to an overall increase of bad loans in the banking system. Even if one looks at the restructured loan basket, large infra companies top the list.
Infrastructure, power, roads constitute at least half of the total chunk of restructured loan accounts. A number of stalled projects are yet to come back on track. According to the Centre from Monitoring Indian Economy (CMIE), the proportion of stalled private projects in the economy to those under implementation has increased from 16.4 per cent at the end of 2013 to 19.4 per cent by December 2015. This indicates that the initial momentum seen in reviving stalled projects has lost after that.
Second, fresh investments credit growth hasn’t picked up to industries, which is a crucial indication of fresh economic activity in the economy. The CMIE data tells us that fresh investments fell by 74 per cent in the December quarter to Rs 1.05 lakh crore worth projects from Rs 4.06 lakh crore worth projects in the corresponding period last year. This should be a bigger concern for the Narendra Modi government since new investments are critical to get the economic momentum on. This would put pressure on the government to continue with spending more.
Third, growth in the manufacturing sector is still a major worry. The core sector growth is a clear indication of that. The growth across eight core sector industries that constitute 38 percent of the factory output contracted by 1.3 per cent in November, in turn, indicating slowing production across key industrial segments.
The December PMI numbers too offered a grim picture registering a fall to 49.1 from 50.3 in the preceding month or the sharpest fall in seven years. The delayed economic recovery has cascading impact on all segments of the economy. One of the direct victims is railways, which suffer from lower freight movements. According to reports, about 65 per cent of railway’s earnings come from freight business, and a slowing economy would mean more hit on its revenues.
The bottomline is: At a time, when India’s chances are considered bright among emerging markets, it is crucial to aid the economy with sufficient growth-propellers. With no signs yet on the private sector investment picking up, the onus of keeping the economic momentum rests with the government. Jaitley will have to forget his fiscal deficit obsession and focus on pushing up public spending.
(Data support from Kishor Kadam)