Fresh capex still some time away
India’s real GDP growth touched 8.2 per cent year-on-year (YoY) in the first quarter of the current fiscal year, with nominal GDP growing by 13.8 per cent YoY. The gross fixed capital formation (a proxy for investment) grew by 7.6 per cent in 2017-18 in constant terms. For the first quarter of 2018-19, this growth is 10 per cent. Despite this, bank credit to non-financial corporates, an indicator of investments in the economy, remains stagnant. A few prominent reasons for the lack of capex by companies have been stretched balance sheets in many sectors, banks getting more careful in lending given the experience in the last few years and low capacity utilisation levels continuing in many sectors.
According to the latest Economic Survey, around $4.5 trillion worth of investments are required till 2040 to develop infrastructure to improve economic growth and community wellbeing. However, clichéd it may sound, the government has to keep the investment flowing in the infrastructure sector to keep the momentum going as there are externalities out here.
The government has already implemented a number of structural reforms in the areas of taxation and legislation. These are expected to build a strong foundation for growth. The measures initiated post-implementation of the Goods and Services Tax and its rationalisation are getting reflected in the recent corporate results. What is now needed is that the processes are simplified so that the small, unorganised and unlisted businesses do not face any hurdles while complying with the norms. As investment will happen when the demand picks up, the tax rates can also be progressively brought down, so that income for discretionary consumption is freed.
Coming to the issue of stretched balance sheets of corporates, savings of private non-financial corporations as a percentage of GDP was 11.2 per cent in 2016-17, down from 11.4 per cent in 2015-16, but was the second highest since 2011-12 (Source: Central Statistics Office). The trend of savings has clearly been on the up, which means the capacity to spend has improved in recent years, though this may not be true across sectors.
Over the next few years, we need to focus on improving exports and domestic consumption to eventually improve capacity utilisation levels. As of the latest Reserve Bank data, in the fourth quarter of 2017-18 capacity utilisation had improved to 75.2 per cent from 74.1 per cent in the previous quarter, and from 74.6 per cent in fourth quarter of 2016-17. The general rule of thumb for capacity utilisation and investment is that once utilisation reaches 80-85 per cent, businesses start to invest in new capacity addition. While there has been some improvement, there is a long way to go before businesses will start investing in increasing their capacities. How do we speed it up? One way could be to provide tax incentives. While there is a fiscal cost to this, eventually higher growth would make up for the lost revenues.
Another standing concern for companies has been the cost of land acquisition and with the change of land titles. Ideally, the government should, in consultation with all stakeholders, plan for industrial areas, where land can be rented or leased to companies. The other obvious constraint comes from infrastructure. In addition, rules and regulations should be eased and simplified to make them business friendly, while taking care of the rights of other stakeholders. Also, it’s quite important to keep the policy guidelines intact to protect the investors’ needs and retain their confidence. Unless we seriously look at addressing these issues, we will find it extremely challenging to gainfully employ our youth and could be reduced to a nation of traders and shopkeepers, rather than manufacturers, creators and innovators.
As investment will happen when demand picks up, the tax rates can also be progressively brought down, so that income for discretionary consumption is freed