X-Ray The Skies For A Good Sign

Positives

• Urban consumer spending buoyant, rural sales picking up slowly

• Prices of some commodities have risen, helping steel and cement units

• Step up in public sector investment in infrastructure boosts sentiments

• FDI inflow record $51 bn during 11 months from April-Feb 2015-16

Negatives

• Sentiment across sectors hinge on monsoon, real estate prices stagnant

• Low capacity utilisation sees pause in private investments

• Weak exports have negative impact on manufacturing

• High productivity and ­formal sector jobs still elude

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Suddenly, the gloom seems to have lifted for India Inc. Whether in casual conversations with bankers in Mumbai or the honchos in Delhi, one thing is obvious: muted prognoses and downcast expressions while talking about the Indian economy have given way to a more upbeat ‘green shoots’ state of mind. It has escaped no one’s attention that this change in mood comes timed with the Modi government’s two-year PR pitch and just before the monsoon break. So, how real are the favourable expectations about the future?

Well, the logic appears simple, perhaps even oversimple. If this year’s monsoon delivers the promise, the farm sector will be looking up and if the Seventh Pay Commission and the OROP—for which Rs 1 lakh crore has been provisioned in the budget—is implemented, there are great expectations of a pickup in the general consumer sentiment. This could improve the battered rural sales, and push industries to ramp up production, leading to better utilisation of capacity. It could also encourage new investments, which have been missing for some time.

QED? As always, opinion is divided. And there are many parts of the economy that are not playing ball. “If you look at the past two years, there is a definite ­indication that there is something positive happening despite otherwise weak indications—drought, poor banking balancesheets and a none-too-conducive external environment,” says N.R. Bha­­numurthy, professor at National Institute of Public Finance and Policy.

Clearly, everyone is looking skywards. Part of the optimism is driven by the prospect of a good summer monsoon from June till September after two years of drought. In theory, the resultant consumer spending—coupled with the government pushing ahead with investment in infrastructure (both urban and rural through roads, railways and port projects)—should jumpstart the lacklustre private sector investment.

“Government spending in rural areas will be a crucial factor in the upswing of private investment,” says Ajit Ranade, chief economist, Aditya Birla Group. He warns it is going to be tough and time-consuming: “Constraints on the corporate sector are the still relatively high debt and relatively low-capacity utilisation, so investment will take time.”

To be sure, the economy currently ­presents a mixed picture. During 2015-16, the index of industrial production (IIP) rose just 2.4 per cent—with manufacturing expanding by 2 per cent, mining 2.2 per cent and electricity 5.6 per cent. Factory output grew by a marginal 0.1% in March. Already the drought has led to wholesale prices of food rising last month by 4.23 per cent year on year compared to a provisional 3.73 per cent gain in March.

“My fear is that the effects will be partially limited because public capex (capital expenditure) is a relatively small chunk of total capex in the economy, and so its effects on stimulating private investment will be limited,” says Chetan Ghate, professor, Economics and Planning Unit of the Indian Statistical Institute. Ghate points out that while the economy has ­revived somewhat, capacity utilisation numbers still suggest that the economy is operating below its potential. The latest IIP numbers has added to pressure that more needs to be done to put the economy on a trajectory of higher growth.

Based on the study of aggregate performance of 622 companies, CARE Ratings in its update on corporate performance for fourth quarter of 2015-16 and first quarter of 2016 states that the view is ‘positive and may be indicative of the first green shoots, though arguably one will have to wait for the sample to cross 1,500 to draw firm conclusions’. CARE Ratings adds that there has been a distinct improvement in sales growth in Q4 and growth in net profit too has shown a semblance of improvement over Q3, though lower than that in Q2.

Industry-wise, too, most companies have shown some improvement, barring banks, chemicals, drugs and pharmaceuticals, forging, telecom equipment and telecom services. Bidisha Ganguly, principal economist, Confederation of Indian Industry, points out that after six quarters of decline, the revenues of most companies have started looking up across sectors. For instance, companies in the IT sector have done well, as also NBFCs—though not public sector banks which have been forced by the RBI scrutiny to improve disclosures of soured credit and set aside more cash to cover write-offs.

The automobile sector, particularly two-wheelers and commercial vehicles, are reported to be doing well, as are the FMCG companies given the rural push of the government through higher spending in programmes like NREGA and also drought relief. Travel- and tourism-related sectors are looking up with a rise in foreign tourist arrivals due to the easing of visa restrictions and strength of the dollar. “While capital goods investment is still to pick up, discussion within industry circles shows infrastructure investment is a lot better compared to two years back in areas like roads, railways and to some extent in ports,” states Ganguly.

Andrew Holland, the CEO of Ambit Investment Advisors, feels much more needs to be done for industry to move into a more robust growth phase: “The economy is seeing green shoots, which is not across the board, and growing in different sectors in different times” Pointing to the problem of idle capacity, Holland opines that investment will happen very quickly only in manufacturing plants where there is about 65-70 per cent capacity utilisation. That is more likely to be a 2017-18 story.

Similarly, Abheek Barua, chief economist, HDFC Bank, states that there is still a wait for a full, comprehensive recovery. Already several sectors like renewable ene­rgy, defence-related manufacturing activity, telecom towers etc, besides the roads sector, are doing well. “We have not seen full manifestation of the rural push by the government but in a few months hope to see the impact. At this stage, you have activity picking up in discreet sectors,” states Barua, citing the fact that the large private equ­ity ­inflow indicates they are convinced about the viability of their investment.

At the centre of this business optimism is the fact that the government has moved ahead with several reforms as part of its efforts to improve ease of doing business, including passage of the long-awaited Bankruptcy Bill that “will ensure that assets are utilised and not wasted. They have taken a lot of steps on bank debts, the RBI has also taken a lot of steps. So a strong movement forward is seen on reforms,” says industrialist Adi Godrej.

After a seemingly prolonged slump, the real estate sector (particularly residential sales) also seems to be looking up. Ashwinder Raj Singh, CEO, Residential Services, JLL India, optimistically states that “all indicators are towards a convincing revival by the end of the year.” He cites recent data that shows a 9 per cent rise in residential unit sales in Q1 2016 as compared to Q1 2015. But of course, it is early days yet for residential property prices—only when they start zooming upwards can we know for sure that the recovery is for real. Till then, we  too must look skywards.