While the Indian economy is in motion, growth not accelerating as expected with private corporate investment recovery turning out to be the missing link, says a report.
In a report, India Ratings and Research (Ind-Ra) says, "The key factor that is holding the acceleration of industrial growth is investment recovery. Besides stepping up its own capital expenditure, the incumbent government has taken several initiatives to revive private investment as also the manufacturing sector growth in the country. However, all this has failed so far to rekindle the animal spirit in the economy. In fact, the Business Confidence Index of National Council of Applied Economic Research (NCAER), which had reached 148.4 in January 2015, slipped to 121.6 in April 2016. Corporates, particularly those engaged in infrastructure, power, iron and steel and textile sectors, are either repairing their balance sheets or saddled with stagnation or even decline in capacity utilisation. We, therefore, expect investments to grow 5.0% in FY17, mainly driven by the government capital expenditure."
Although the government has tried to do its bit to revive the investment cycle as can be seen from the FY16 and FY17 budgets, unfortunately the share of state and central government capital expenditure in the total capital expenditure in the economy is only 16%. As the balance 84% comes from the private corporate sector, which includes central and state public sector undertakings, Ind-Ra says it believes government capital expenditure can play only a limited role in reviving the capex cycle.
In the absence of investment demand, Ind-Ra says, the key support to industrial growth is coming from the consumption demand. Moderation in both inflation and lending rates of banks is aiding the consumption demand in urban areas. Salary revision of central government employees due to the award of the recommendations of the Seventh Central Pay Commission will further aid the urban consumption demand. Also, with favourable monsoon so far, Ind-Ra says it expects even rural demand to recover in FY17. However, it will still not be sufficient to drive the industrial growth higher than the 7.4% witnessed in FY16.
The ratings agency says it also feels that the situation is more complex than hitherto believed. As in the aftermath of debt-fuelled expansion both banks and corporates are repairing their balance sheets, it has led to a virtuous cycle whereby banks are not lending and private corporate sector is not investing. The impaired asset ratio of the banking system is expected to inch up to 12.5%, including assets reconstruction companies’ receipts but excluding Discom bonds, by FY17.
"The median debt-to-equity ratio for infrastructure, iron and steel and textiles sectors increased to four to six times in FY15 from under two times in FY10. Ind-Ra says its estimates suggest that 240 of the top 500 borrowers belong to the stressed and elevated risk of refinancing categories and will remain exposed to significant refinancing risk during FY17. Clearly, there is no easy way out as the process of balance sheet repairing or cleaning will take time, it added.
The ratings agency also revised also revised its gross domestic product (GDP) estimate for FY17 upwards to 7.8% (FY16: 7.6%) from its earlier forecast of 7.7%. It said, "The upward revision has been prompted by the progress of monsoon and the sowing of kharif crop so far. With the exception of East and Northeast, the rainfall in other regions of the country has been more than long period average (LPA). Cultivated area under kharif crops on 19 August 2016 was 5.7% higher than the normal area (average of latest available five fiscal years). As a result, we now expect the agricultural gross value added (GVA) to grow 3.0% yoy in FY17 compared to the 2.8% forecasted earlier."