Budget 2015: A make or break for investor confidence; Modi walking tight rope

The Union Budget 2015 assumes unprecedented significance for it can act as a ‘make or break factor’ to chart the course of investor confidence from this point, future investment decisions and the outlook of global rating agencies on India, industry leaders, bankers and economists warn.

The investor confidence, boosted in by the election of the Narendra Modi government in May 2014 to power, has begun fading in the absence of big-ticket reforms and any notable changes in business environment on the ground. Investors are eagerly looking for a clear cut road map from the budget for investment-led growth.

If the budget manages to hold on to the promised reform path and offer some convincing measure, that can offer Modi some more time to proceed with his reforms through small-steps model the government has experimented so far, with investors on his side.

On the other hand, if the budget is a turn off, things can be a bit difficult for the government, which aspires to go ahead with its huge disinvestment agenda. A number of PSUs, including government banks, are in queue to hit the markets to raise capital.

Fading confidence

Industry leaders complain that there aren’t any major changes in the way businesses are handled compared with the UPA regime, even though the government argues otherwise saying it is being blamed for being too fast .

The Modi government, which assumed power some nine months back with a decisive mandate and much fanfare, hasn’t been able to convince the industry with big changes on the ground.

“People have been talking positive in the last 8-9 months. But, action and implementation have been poor,” Sunil Kanoria, vice-chairman, Srei Infrastructure Finance Ltd, told Firstpost in a pre-budget interaction.

Deepak Parekh, chairman of Housing Development Finance Corporation, is the latest to criticise the government for inaction and slow decision making process.

“After nine months, there is a little bit of impatience creeping in as to why no changes are happening and why this is taking so long having effect on the ground,” Parekh said .

The damage, perhaps, was done by the high expectations, when the NDA government took over in May last year with big promises to bring ‘achhe din’ and boost investor sentiments.

Modi’s promises had brought great relief to industry and investors, battered by the ill effects of a prolonged period of economic slowdown and policy paralysis, attributed to the inaction of the Congress party-led United Progressive Alliance government’s decade-long rule.

The government has indeed taken some steps to stimulate the economy, which include promulgating crucial ordinances on coal, insurance and land acquisition norms. But conversion of these ordinances into legislations wouldn’t be an easy task for Modi, given the BJP doesn’t have majority in the upper house.

Parekh argues with his own group’s example. “Things are happening at such a speed around the world, we need to move faster as well. Just to give you an example of our own case. We needed to raise some capital in HDFC Bank. It took more time this time than earlier years to get approvals from FIPB etc," Parekh said.

Number mismatch

Bankers, businessmen and economists aren’t much convinced with the mismatch between the positive macro economic numbers and the reality on the ground.

One latest example is India’s high economic growth portrayed by the new, rebased set of gross domestic product (GDP) numbers that estimate 7.4 percent growth in the 2014-15, which, if true, will make India world’s fastest growing economy, matching that of China.

But a section of the economists and industrialists have expressed their concern on the big mismatch between the estimates and the reality.

For instance, the December factory output numbers remind one the true state of economic activities, regardless of the country’s new-found status of China-like growth rate.

The fall in IIP numbers to 1.7 percent from 3.9 percent in November, showed that growth has remained anemic and signs of strong revival that could offer a sharp trend reversal are yet to take place.

That too, one should note that such low growth has come despite the benefit of a lower base in the corresponding period last year. In December 2013, IIP grew 0.1 percent.

Taking a closer look, the decline is visible across all key segments, including manufacturing, electricity, capital goods, while there is a marginal growth of 0.7 percent in the consumer goods segment compared with a decline of 2.2 percent in the preceding month. This means that consumers have begun spending, even though there is no real pick up when it comes to large projects.

The divide is particularly visible in the manufacturing, which grew just 2.1 per cent in the month. As per the revised GDP estimates, manufacturing is expected to grow 6.8 percent for the full year. But, going by the current indications, most economists do not see this happening. They expect the segment to grow by 2-3 percent for the full year.

Some also point out the variation in the finance sector growth, which is to register growth of 13.7 percent, while growth in deposits and credit appears to be very tardy.

“While these numbers (the revised GDP numbers) reinforce the view of the earlier series of improvement, the numbers get magnified significantly. Therefore, overall perception on economy should not be changing,” Madan Sabnavis, chief economist at Care ratings, said.

Where is the money?

The bank credit growth, which is cited by most economists, as a proxy of actual economic activities on the ground, has remained nearly stagnant in the recent years and hasn’t seen any major pick-up until now.

For instance, bank lending to industry has grown by just 2.1 percent for the fiscal year until December compared with 8.1 percent in the corresponding period last year. Of that, credit growth to large companies stood at 1.8 percent compared with 7.7 percent in the year-ago period. Deceleration in credit growth to industry was observed in all major sub-sectors, barring a few such as construction and beverages & tobacco.

Even in the infrastructure segment, which consists of power, telecom and roads, loan growth has remained tepid at 6.8 percent compared with 10.3 percent a year back. Absence of a pick-up in fresh money flow to industries indicates some sort of mismatch in the GDP numbers and the actual situation on the ground.

Besides, the level of stressed assets in the domestic economy doesn’t indicate an improving economic picture as yet. Stressed assets have only risen in the recent quarters as reflected in the earnings report cards of most banks, including the ones that announced earnings in the December quarter.

The bottomline: Many, like Parekh, believe that Modi had his “nine lucky months” with crude prices on the lower side, which is a major a reason for the recent fall in inflation numbers. But, to which direction the wind will turn from here, is uncertain.

The momentum of high investor optimism, which the economy gathered with the arrival of Modi at the centre in May last year, has indeed taken a pause, and is, probably, waiting for strong cues from the budget.

Whatever the outcome is, that will chart the course on consumer confidence from this point.