Delayed recovery in Investments to dent GDP growth…
Rarely can an engine fire up on choked cylinders . India’s economic engine is sputtering with one of its key cylinders clogged . Sedate IIP ( Index of Industrial Production) numbers for successive months , pulled down mainly by capital goods, is a cause for serious concern . It is this choked capex cycle that is causing challenges to the current political administration .
Economic cycles do have established pattern . In early part of the cycle , consumer discretionary like Autos , Consumer durables etc lead the recovery . In the mid-cycle , Investment demand (capex) picks up as factories / plants come up on corporates scaling up capacity to meet the additional demand . On the later part , both feed each other to fuel boom in overall consumption . Is this familiar pattern playing out this time too or is this time different . Pundits who pumped up predictions based on the past patterns , stand perplexed now with the investment engine refusing to fire up . Delay in capex recovery has miffed the mid-cycle macro numbers .
The concern on capex cycle is so severe that it needed no less than the PM to nudge corporate chieftains to start investing , in his recent meeting with India Inc. Corporate honchos on their part , had to find a scapegoat . They found it in cost of capital and raised their chorus for rate cuts , knowing well that it can hardly halt the slump in private investments.
If rate cuts can’t relieve the pain , what else ?. Let us start with what ails India’s investment cycle that mars it from achieving its magical potential . While land and labor reforms are key to structural shift for long-term growth potential , they hardly pose challenges for the current tactical turn in the investment demand. The ongoing investment inertia is more to do with huge surplus capacity across sectors . Roots of the malaise lie at the gross under-utilization in many sectors . High capital intensive sectors such as energy , metals , oil&gas suffer from serious surplus capacity globally . Slump in commodity prices has severely dented the sentiment in these capital intensive sectors . Slow down in real-estate has added to the capital woes , given its much broader impact on various other ancillaries. As per one of the estimate , in the earlier boom cycle of 2003-07 , close to 45% of the additional investment demand came from these sectors . With these sectors now under severe stress , huge quantum of capex demand has crumbled . Add to these , the scary surplus in global capacity ( on slowing Chinese demand) in many of these sectors ,the outlook gets much worse and grim.
All is not lost though . While private investments are looking peevish , public investments could pave the way for partial recovery , can’t compensate completely though . With India’s macro numbers ( fiscal and current account deficit) looking up on benign commodity prices , Govt. has a lot of leeway to provide stimulus by accelerating investments in infrastructure . Power transmission , road , railways and irrigation etc have seen heightened allocations from the Govt. this year . This , to some extent can offset the under-investment by the private sector.
For investors , deciphering the dynamics behind this distress signal is key for critical insights to shape and build the right investment strategies for the ongoing cycle . There will be winners and losers because of this underlying trend . For example , delay in recovery in private consumption could severely dent the prospects for PSU banks as a sector . The reason being the lending profile of these banks . With Capital goods and Infra accounting for a significant part of the lending books in PSU banks , credit growth will continue to be choked for a while in this space . Added with ongoing NPA menace , this down-cycle could be far more deeper for the sector . So is capital goods . For winners in this space , one needs to keep a close watch on where Govt. stimulus is spent . From that perspective , Road , Railways , Defense and Irrigation etc are some that could offer solace in this sputtering space.
ArunaGiri . N
