Updated: July 4, 2022 10:44:30 am
As inflation remains a key concern amidst the ongoing Russia-Ukraine war and the central banks continue to raise rates, Amish Mehta, MD & CEO, CRISIL Ltd told Sandeep Singh that all this could shift the investments by 2-3 quarters. He said that the longer-term story of investments and credit growth is intact and credit growth should be in double digits this fiscal. Edited excerpts:
Inflation has been a big concern and the US Fed raised rate by 75 basis points in its last meeting. What does that mean for India?
The persistence of US inflation has been a surprise. In just six months since December, they have halved the US GDP growth projections for 2022. The Fed has signalled it will raise another 50 to 75 bps in July. In the US, Fed is talking about a sharper growth slowdown and they are clear about bringing inflation under control. Fed participants expect the fed funds rate at 3.25-3.5% by end of 2022.
So money should move to the US. We, in India, have seen pretty high outflows.
India will have to react to what is happening globally. Our own inflation rate has remained above the RBI’s comfort level and hence the RBI has to react. We expect at least 75 basis points more of rate hikes by the RBI this fiscal.
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The government has adjusted excise duty on petrol imports. It has also put export duty on some steel products and reduced import duty on some raw materials for steel. They are closely monitoring, because on the one side is the impact on consumers, and on the other is the rising subsidy and fiscal deficit. It’s a tough balancing act. There is going to be pressure on both, the current account deficit and the fiscal deficit.
It’s a tough act for the government and it will have to find financing. Right now, we don’t know if the tax collections will be enough to bridge the gap. So borrowings could rise and investments could be lowered.
As for companies, we are seeing margins contracting this year and it could contract 150-200 bps, depending on the persistence of inflation. Tax collections could improve with better disclosures, but the deficits remain a challenge.
While the world was emerging out of pandemic, how do you see the imapct of Russia-Ukraine war?
Now the Russia-Ukraine conflict has clouded outlooks. It has been over 100 days now and the uncertainty is bothersome. If it continues, it would mean impact at a much larger level, especially via oil and gas, and fertilisers and food. While the demand-side challenge exists, a much larger supply chain-side challenge continues after the pandemic subsided.
If the Ukraine-Russia war were to end, it will ease the pressure on some commodity prices that could help efforts to tame inflation. However, the more prolonged the conflict, the more challenging it will be to deal with. At a macro level it will accentuate downside to growth and upside to inflation.
The RBI Governor has stressed on resilience of the economy. How do you see it?
These are relative calls. If we compare the previous crises and today, large and medium-sized companies demonstrated that they have the ability to survive and continue the momentum. A lot of the smaller players were not able to do so. If you see across industries, most leaders have actually gained market share; their volumes have increased, and margins have improved. They have been disciplined financially and most have repaid loans. So today, if they have to seek expansion or want to invest, they are in a much better position.
But the small and medium enterprises, the micro enterprises, are not necessarily in the same place. For them, the pain will be prolonged, with demand and supply remaining disrupted. Their working capital needs have risen given high inflation and rising interest rates, so costlier borrowings.
The government offered a huge helping hand during the pandemic with the ECLGS scheme, but they did not generate extra cash flows. If demand doesn’t rebound and they can’t generate additional cash flows, there will be impact.
While services-related MSMEs are seeing a revival, there will be impact across the spectrum. Most continue to be vulnerable. Return of demand is crucial.
The rural segment was in a good position in 2020 but inflation is hitting them hard now. All eyes are on the distribution of monsoon. But spending power is constrained in hinterland. The two-wheeler and FMCG data indicate as much. The government has taken initiative for the poor, and they will continue to give free food. While that takes care of sustenance, it’s not generating cash. So they can’t spend.
There has been an uptick in credit growth over the past few months. Where do you see the green shoots?
If you look at the banking sector, it was very well prepared to handle the crisis at this point of time. NPAs are under control, liquidity is good, provisioning has improved, capital levels are good. Their ability to lend and fund growth is there.
Core sectors such as steel and cement have seen good momentum in the past few years. With the infrastructure push the government has provided, the construction industry has been doing well. We are also seeing momentum in steel exports. Capacity utilisations have improved.
As for capex, some large companies are lining it up, but from a capacity utilisation perspective, demand is not back to the pre-pandemic levels.
The other green shoot is the Production-Linked Investment (PLI) scheme announced across 15 sectors. That is something we are seeing a lot of corporates pick up. It is a short-term measure with a timeframe, but around Rs 2-2.5 lakh crore of capex over FY23-25 is likely to happen and will drive investments.
We see private capex in 2022-2027 growing at twice the rate of what we saw in 2016-2022 because of PLI, and the green thrust from renewables and electric vehicles (EVs). Again, EV would mean the entire ecosystem including battery infrastructure. I would say we are going to see a lot of that coming into play.
The momentum on the green side is good, with announcements on renewables, solar energy, and the discussions around hydrogen. Many companies have started investing in capex to drive the green agenda. In PLI, we think green capex will be half of the overall capex of Rs.2-2.5 lakh crore. Also, the total decarbonisation-linked capex is pegged at Rs.22-24 lakh crore until 2030.
Given the current geopolitical situation, investments might get shifted by 6-7 months, but overall, the direction is clear. I think the longer-term story of investments and credit growth is intact. We expect credit growth to be in double digits this fiscal versus single-digit last fiscal.
Is India also in a much better position due to the China + 1 strategy of global majors?
Given the pandemic and the current geopolitical crisis, stakeholders across the world are examining global supply chains. They are going to formulate strategies to manage challenges similar to the ones we are facing. The stakeholders realise they cannot be dependent on one place or one country or one plant; they must diversify. India’s opportunity lies there.
But, there are many other factors, including reforms that will enable this. The ease of doing business should, well, ease more to enable things. Global corporations think of multiple factors when considering what makes a viable supply chain. We need to create that set-up, the stability in policy. Companies look for stability since they make long-term investments.
The government has to enable that framework, giving global investors and corporations confidence. We have a great opportunity. If we are able to ensure the enabling aspects, global corporations will view India as a viable destination. That will augur well from an employment perspective as well.
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