The industry normally views the Budget as a key policy document that goes beyond numbers, and underlines the future political and economic priorities. The current one is no exception. It focuses on two key areas - rural sector growth and infrastructure development. If these thrusts are successful, it can lead to the much needed revival in demand along with acceleration in growth. These apart, the Budget also emphasises on social sector spending, financial reforms and ease of doing business. Given its inclusive orientation, the Budget seems to have avoided any big bang benefit extension for the corporate sector.
The Indian economy has performed relatively well in a world facing a deceleration in GDP growth and intense volatility in macroeconomic parameters. In fact, the numbers look great - GDP in real terms has grown at 7.6 per cent, CPI inflation has come down to 4.8 per cent (April-Jan average over the same period last year), fiscal deficit as percentage of GDP has been contained at 3.9 per cent and current account deficit has come down to 1.4 per cent. These are not mean achievements given the strong headwinds in the international markets.
The GDP, in nominal terms, grew at 8.6 per cent in 2015/16; after netting of indirect taxes and subsidies from GDP, the GVA is estimated to have grown at 6.8 per cent in nominal terms. During the same period, the interest rate as indicated by public sector bank's base rate was around 9.6 per cent. In other words, the interest rate was 2.8 per cent more than the GVA growth rate. This would have created an unsustainable cash flow squeeze. At the enterprise level the problem is no different.
Whatever is happening at the national GVA level is also getting reflected in the case of a sample of around 4,000+ firms representing the Indian corporate sector. In fact, the situation is worse as these firms are growing negatively. When these firms grow negatively and simultaneously have to pay an interest rate of at least 9.6 per cent, the cash flow would be under tremendous squeeze. Interestingly, even the Economic Survey acknowledges a similar development.
Soon, these firms in the corporate sector may start defaulting, adding to the woes of banks. Situation could be even worse for the MSME sector, which has to pay around 11.5 to 12 per cent rate of interest. Given this scenario, it is important that we create an environment in which the overall investment demand will go up in nominal terms and interest rates will come down.
Fortunately, the government believes in adhering to the fiscal deficit target of 3.5 per cent for 2016/17, inflation continues to be benign, WPI inflation is negative and the implicit GVA deflator is negative - all these provide significant space for monetary policy. Considerable scope exists for improving liquidity and bringing down interest rates. We have already seen that the Budget's 3.5 per cent fiscal deficit target has been accepted as a credible one by the market. The long-term bond yields have come down and bond prices are showing an upward movement. What is missing is some action at the short end of the curve; an active intervention by RBI both in terms of rate reduction and better transmission would be needed. Since January 2015, RBI has reduced rates by 125 basis points; however, at best, 70 basis points have been passed on to the borrowers.
This is one part of the story. The more difficult one relates to demand generation in the domestic market. Some major spending programmes have been delineated in the Budget document; it is expected that they would be able to crowd in enough private investment. A fillip in investment coupled with productivity gains from the reform process would enable the country to reach 11 per cent nominal GDP growth, which is the target for 2016/17. This 11 per cent nominal GDP growth is implicit in the tax revenue projections for 2016/17. However, this presumes availability of adequate liquidity in the system.
In the recent past, from 2003/04 to 2007/08, India's remarkable growth was also supported by favourable international circumstances. Currently, the international scenario is turbulent; consequently it is more sensible to focus on domestic demand. This is exactly what the government is trying to do through its various initiatives. Given this scenario, Indian enterprises - be it in consumer goods, intermediates, capital goods or services - have no reason to feel despondent. Leading indicators suggest that overall capacity utilisation will improve from the current level of around 71 per cent to 73 per cent within the next two quarters. However, certain sectors have structural problems, sooner these are addressed the better. Examples are accumulation of subsidy receivables in case of fertilizer sector, mounting utility assets of power companies, etc. Delay in payment increases working capital costs; as a result, margins come down dramatically.
The other sectors which have structural problems are electronics and consumer durables, often they are confronted with inverted duty structure on account of bilateral trade agreements. In case of metals, competitiveness alone may not be able to guard our industry against extended periods of targeted dumping. By and large, our logistics costs are relatively high, so are our transactions costs. Hopefully, better infrastructure and reforms related to ease of doing business, as envisaged in the Budget, would bring this down over a period of time. Addressing all these would bring back investor confidence and accelerate the growth momentum.
The writer is Economic Adviser, TATA Group
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