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Slow Crawl To Recovery

Getting private investments going is imperative to get sustained 8% growth. Policy measures are critical to spur the private capex cycle

Slow Crawl To Recovery

On the face of it, Budget 2019/20 does not have magnanimous steps to spur private investments that the Economic Survey underlined. But look deeper, and one can see a series of measured steps.

The government's intent to reduce fiscal deficit from 3.4 per cent of GDP in FY19 to 3.3 per cent in FY20 and raise a part of its borrowings offshore, will help 'de-crowd' the bond market, lower interest rates, and therefore can invoke investments. Second, the Rs 70,000 crore recapitalisation of public sector banks will help fuel credit growth. Third, the increase in customs duty is expected to aid local manufacturing and improve utilisation. The reduction in customs duty on inputs, on the other hand, will improve competitiveness in sectors such as petrochemicals, electronics, auto components, etc. Fourth, FDI in aviation, media and insurance can have salutary rub-offs. Fifth, key infra segments have seen a spurt in allocations - roads (up 13 per cent), railways (up 15 per cent), aviation (up 42 per cent), housing and urban development (up 6 per cent) - compared with the revised estimate for fiscal 2019. That should bolster capacity utilisation in allied segments, a precursor to investments.

To be sure, private capex growth has had a protracted slump in the past few years, with private share in gross fixed capital formation dropping to 75 per cent as of 2018 from ~80 per cent in 2011. It is also reflected in the RBI's data on private capex, wherein the investments approved by banks and financial institutions contracted by (10 per cent) over the past seven years to an estimated Rs 1.7 lakh crore in 2017/18.

Incremental supply - riding on a few years of aggressive capex, spurred by easy availability of finance - far exceeded incremental demand in key industrial and infra sectors, especially as demand slowed. Debt-funded capex also sharply increased leverage for many large players across infrastructure and industrial sectors, impacting their ability to make fresh capex.

Getting private investments going is imperative to get a sustained 8 per cent growth. Policy measures and acceleration in government spending are critical to bring the private capex cycle out of the multi-year slump.

We can take heart from some very early green shoots with capex showing some uptick, albeit on a low base. Aggregate capacity utilisation inched up to 76 per cent in the second quarter of fiscal 2019 - the highest in at least six years - driven by steel, cement, aluminium and petrochemicals sectors. Balance sheets of corporates have improved in the last few years on the back of limited fresh capex. And both revenue and EBIDTA of India Inc have risen 8-9 per cent in the past three years.

This is reflected in the debt weighted credit ratio for CRISIL's rated portfolio, which has risen above 1 (upgrades more than downgrades) in the past two years.

Notably, credit ratio has also improved for capex-intensive sectors such as ferrous metals, auto components, construction, and capital goods. These sectors benefitted from volume recovery, currency depreciation and benign interest rates. Such improvement in the balance sheet of large corporates, which account for a large a part of private capex, is positive for future capex cycle revival.

Stress in the banking sector is also abating, which will be conducive to a capex pick-up. Under the Insolvency and Bankruptcy Code, 94 cases with liability of Rs 1.7 lakh crore have been resolved in three years and another Rs 1-1.5 lakh crore is inching towards resolution this fiscal.

In the near term public investments will continue driving capex growth. Infrastructure investments across sectors such as power, highways, ports, etc. over the block of next two years (FY20 and FY21) is estimated to be 30 per cent higher than the previous two years block (FY18 and FY19). Industrial capex is expected to rise by 15 per cent in the same period. However, consumption-oriented sectors would witness a decline in capex on account of moderating demand growth prospects.

The writer is MD and CEO of CRISIL

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