Why did the Union Finance Minister urge industry stalwarts to invest in manufacturing? Is private sector funding at an all-time low? Has the government’s intervention to boost infrastructure and spend aggressively at the right time?
Why did the Union Finance Minister urge industry stalwarts to invest in manufacturing? Is private sector funding at an all-time low? Has the government’s intervention come at the right time to boost infrastructure and spend aggressively?
the story So Far: Last month, Finance Minister Nirmala Sitharaman asked industry leaders what was stopping them from investing in manufacturing. Comparing the industry to Lord Hanuman of Ramayana, he said that the industry does not realize its strength and should move forward with confidence. She said, “It’s time for India… we can’t miss the bus”.
Why did he make such a request to them?
Clearly, the finance minister did not see the investment taking place at the pace she would have liked. Hoping to revive private investment, the government in September 2019 reduced the tax rate for domestic companies from 30% to 22% if they stopped availing any other tax SOPs (Standard Operating Procedures).
Earth Global CEO Niranjan Rajadhyaksha says Indian private sector investment has been weak for almost a decade. “If we look at the drivers of economic growth right now, the amber lights are shining. The export story will be in jeopardy due to the global slowdown, with a narrowing fiscal deficit limiting the government’s ability to support domestic demand. Due to the K-shaped recovery, private consumption is concentrated only in parts of the income pyramid.”
What is the current scenario?
Let us look at some of the indicators from the past few months; Normally, changes in numbers are in relation to year-ago figures, but when we’ve been through something as sudden and life-changing as an epidemic for at least two years, it It is useful to see how the figures from quarter to quarter or month have changed. This gives us an idea of how well or poorly we are healing. In the GDP figures for the quarter ended June, Gross Fixed Capital Formation (GFCF) at 2011-12 prices grew by 9.6% to ₹12.77 lakh crore, from ₹11.66 lakh crore in the first quarter of FY15. That was the period before the pandemic. This is in terms of overall GDP growth of 2.8% to ₹36.85 lakh crore in the first quarter of FY20 from ₹35.85 lakh crore in the first quarter of FY15. Manufacturing GVA (Gross Value Added) also increased by 6.5% to ₹6,05,104 in Q1 FY23 from ₹5,68,104 in Q1 FY20. However, when one looks at the manufacturing growth from the previous quarter of April-June versus January-March, we see that the sector has faced a 10.5 per cent contraction. While private final consumption expenditure, an essential pillar of our economy, climbed 26% year-on-year for the June quarter, private spending at ₹22.08 lakh crore in April-June 2022 accounted for a significant ₹54,000 crore, or 2.4%. Less than what was spent in the previous quarter. And the GFCF, which is seen as a proxy for private investment, shrank by 6.8% quarter-on-quarter.
Industrial production has registered an increase in the first five months of this financial year starting April as compared to a year ago; But worryingly, the monthly figures seen in the Index of Industrial Production (IIP) and the S&P Purchasing Managers’ Index (PMI) for manufacturing have moved in fits and starts. in an article Hindu Earlier this month, Pulapre Balakrishnan, who teaches at Ashoka University in Sonepat, Haryana, argued that while capital expenditure by the government is a harbinger of private investment, it will continue to trend in public spending for at least half a decade. To help generate enthusiasm in the private sector. Though the government’s intention to spend aggressively on infrastructure in the current fiscal budget is encouraging, he says the trend should have started a few years back. The government has now announced its intention, they say, it should now focus on a few priorities; One is that it must identify the right projects – investments should be made in infrastructure that enhances productivity. Second, he warns that inflation can derail most well-designed public spending programs, and urges a step-up in farm produce to help rein in food inflation.
What’s up with the demand?
Private companies invest when they are able to anticipate profits, and this comes from demand. The Consumer Sentiment Index of the Center for Monitoring Indian Economy (CMIE) is still below pre-pandemic levels, but much higher than 12-18 months ago. RBI’s Monetary Policy Report dated 30 September says “Data for Q2” [ended Sept] Aggregate demand bounced back, indicating an ongoing recovery in demand for private consumption and investment. It shows that seasonally adjusted capacity utilization increased to 74.3% in the first quarter – the highest in the past three years. Manufacturing firms registered a gradual increase in new orders, while infrastructure firms displayed optimism on the overall business position, turnover and employment in Q2: 2022-23.
In an article on the state of the economy in the RBI’s monthly bulletin released last week, the authors, led by Deputy Governor Michael Debabrata Patra, emphasized that contact-intensive sectors will have the potential for rejuvenation as the containment due to the pandemic eases. “Festival-related spending was already driving consumption demand with positive externalities to other components of domestic demand.”
Dr. Rajadhyaksha of Earth Global says that we are a little far from the capacity utilization at which an investment cycle usually begins. Capacity utilization is now much better than it was during the pandemic when it slipped to 67-68%. The general rule, he says, is that the capital expenditure cycle actually escalates when capacity utilization reaches around 78-80%. We’re hovering over that area but aren’t there yet. “If I have to make any guesses, in the coming months, the private investment cycle should accelerate unless there is a real external event that sets the entire global economy back.”
An online survey on consumption outlook by UBS Evidence Lab India was conducted in August with 1,500 consumers. Nearly three-fourth of the respondents in this survey mentioned a stable or rising income level (compared to 54% in the August-21 survey). The results suggest higher purchase intent for cars and two-wheelers, a distinct propensity for property, and moderation for certain consumer durables (including computers/laptops, refrigerators, ACs). (The survey broadly relates to the ‘high income’ or ‘upper middle income’ sections of India’s income pyramid on socio-economic classifications and is therefore not representative of the larger population as per UBS.) Household savings intent remained high with 56 % of respondents indicated that they plan to increase their savings at the end of the year.
And that could be the key to the investment cycle in response to the Finance Minister’s remarks.