Government expenditure and consumption may be watering the green shoots, as reported earlier in this series, but that may not be enough to sustain growth.
Macro data flowing in this month on industrial growth, trade and the Purchasing Managers Index — a measure of future orders and, therefore, investor sentiment — strongly point to deep depression in the industry and the expansive ground it has to cover in the coming quarters.
For, moribund private investment, poor capacity utilisation and shrinking space for big spend by the Centre and states will mean that a recovery in investment cycle, so crucial for sustainable growth, will, at best, be slow and grinding, and will take at least 12-18 months to show.
“There has been a 6-7% increase in overall capital expenditure in 2015-16 but the break-up is telling. The private sector industry capex was negative last year. Even the 7% overall increase is skewed. Government-driven sectors such as roads have grown and there are just a few industries such as renewables (solar power), telecom and fertilisers where investments are happening,” says Prasad Koparkar, Senior Director, Industry Research, who closely tracks 70-odd sectors in rating agency Crisil.
India Inc was adding phenomenal capacity during 2010-12. And companies were borrowing heavily to expand, with India joining the rest of the world in providing a fiscal stimulus by spending more to kickstart growth after the 2008 global economic crisis.
In India, many core sectors such as cement, steel, automobiles and auto ancillaries were on an overdrive.
Take for example, cement and steel. And see the contrast between the heydays of 2010-12 when capacity was being added by most cement companies and now.
In 2009-10, the operating rate of the companies was about 85%, and in the next two years, it varied between 75% and 78%. In 2015-16, latest data suggests, it was just about 69-70%. The average capacity addition then was 35-40 mtpa (million tonnes per annum) and now is just 10-15 mt. In the south, the industry actually shrunk by 1% last year.
A senior executive in India Cements, the market leader in south India, where the industry is operating at an abysmal 55% capacity utilisation, said, almost three-fourths of the cement demand comes from housing or real estate. “In India, despite the 7-7.5% growth rate, neither is there any job creation nor security for people in existing jobs. So, naturally the propensity to invest in housing is very low. The real estate sector is languishing which shows up in poor cement sales,” the executive, who did not wish to be named, said.
The cement industry — which traditionally grew 1.1-1.2 times the GDP growth rate — grew just about 5% last year.
In steel, which is more a globalised sector unlike cement, monetary and fiscal stimulus led to huge capacity addition and steel firms were operating at 80-83%. A dramatic shift has brought the operating rate down to 73%. During the peak year 2011, 80 mt capacity was added. In the last four years between 2010-11 and 2015-16, the total capacity added was just 30 mt. “Globally, prices have crashed and we won’t add even 20 mt during the next five to six years,” said Crisil’s Koparkar.
The problem is huge capacities were set up during 2011-12 premised on much higher domestic demand and also external demand. But both slumped in the last couple of years, said Abheek Barua, Chief Economist, HDFC Bank. The industry has had a rough patch even earlier, for example, in the years leading up to 2003. But the turnaround starting 2004-05 till 2007-08 was strongly supported by robust external demand,” he said. External demand has slumped now as is evident from exports declining for 17 months in a row.
The scenario is not so different in passenger vehicles either. “In 2010-11, car sales stood at 25.01 lakh units. Last year, it was 27.89 lakh. Even after five years, the industry has grown just 10% against a long-term average growth rate for cars has been 12-13% every year. The robust numbers in medium and heavy commercial vehicles too are largely driven by fleet replacement by big operators,” said a senior executive with Maruti Suzuki, the market leader in passenger cars, who did not wish to be named.
The green shoots in light commercial vehicles and two-wheeler sales too may disappear with funds drying up for e-commerce start-ups which were driving growth in these two categories.
The poor show of the capital goods sector in the March IIP (Index of Industrial Production) is also symptomatic of the problems faced by industrial manufacturers. For state-owned Bharat Heavy Electricals Ltd, for instance, the problem is of slow-moving orders, thwarting its ability to plan fresh investments. The company has classified roughly about Rs 37,000 crore worth projects as “slow moving” — those on hold, stranded or where the start date is still unclear. “We are yet to see improvements here. The expectation is that discom (power distribution companies) reforms and the passage of the Bankruptcy Bill will have a positive effect on their movement. But otherwise, projects where the start date is not announced, where clearances are awaited, are still a big problem for us,” a BHEL official, who did not wish to be named, said.
The fiscal space for both the Centre and states to invest is also constrained, with both grappling with two new spending pressures — the interest bill on power sector reform scheme UDAY bonds and Pay Commission wage hikes. Accounting sufficiently for both suggests that state deficit could rise to 2.9% of GDP in 2016-17 from a revised 2.7% in the previous year. In its latest report analysing state budgets, the RBI has clearly stated that UDAY may have adverse implications for state finances on account of burgeoning liabilities due to takeover of 75% of the existing debt. “This would considerably reduce the fiscal space of states which might lead to curtailment of capital expenditure with an adverse impact on growth,” the central bank said. Although the effect may not be instantaneous, it said state finances may come under stress. While 18 states have already signed up for UDAY, four have already issued bonds to the tune of Rs 1 lakh crore.
A “crowd-in” effect — where higher government expenditure spurs private sector investment — may not happen so soon with neither the Central government nor the RBI willing to use fiscal and monetary steroids to push growth. “Fiscal deficit as a percentage of GDP is coming down. “The Centre is not sacrificing fiscal position and the RBI is not compromising on the monetary side,” said DK Joshi, Chief Economist, Crisil.
“For growth to be secular, both consumption and investment should do well. Capital formation has been so weak for so long. Without investment, consumption-led growth alone will not be sustainable,” says Sunil Munjal, Joint Managing Director, Hero Motors, the largest two-wheeler manufacturer in the country.