Will the Budget unleash the animal spirits?

Investment, according to former Reserve Bank of India governor C Rangarajan, is an act of faith in the future. It is the lack of this confidence that has seen investment in the economy turn sluggish and remain lacklustre over the last few years. At 26.4 percent the Gross Fixed Capital Formation (GFCF) — a measure of investment in the economy as a percentage of GDP, is at its lowest level in the last 13 years. It goes without saying that a strong GFCF is critical to regain a higher pace of growth.

During the heady days of 2005-11 when the Indian economy clocked average growth of 8.8 percent, average GFCF was 31.57 percent. The decline in GFCF is largely attributed to lower investment by India Inc. At around 22 percent of GDP, private investment today is as much as it was way back in 2004-05.

The 2018 Economic Survey rightly emphasised the importance of private investment by saying “...India must continue improving the climate for rapid economic growth on the strength of the only two truly sustainable engines — private investment and exports.”

The expectation in the run up to the Budget was that Finance Minister Arun Jaitley would go a long way to lift business sentiment and offer strong incentives for investment, including a possible across-the-board reduction in corporate tax. This is because the feeling, as encapsulated in the Economic Survey, was that the slowdown in investment was difficult to reverse as it stemmed from balance-sheet stress and the fall was so large that an automatic bounce-back was unlikely. But Jaitley seems to think otherwise and has preferred the green shoots of a recovery that is being felt now to evolve on its own into a broad-based capex revival. On his part, he has not done anything in the Budget to upset that recovery.

Green shoots

GFCF, which had shrunk by 2.1 percent in the last quarter of FY17, has begun to grow. In the first quarter of the current fiscal year it grew by 1.6 percent, followed by 4.7 percent growth in the second quarter. A sharp recovery in demand for certain sectors, such as auto, construction equipment, machine tools, tractors, cement (in select regions) and fertilisers, has seen their capacity utilisation move up, and some of them have started to free up their capacities apart from contemplating expansion.

“For the first time in six years I have started to worry about capacity constraints,” Srivats Ram, Managing Director, Wheels India, a TVS group company, told BusinessLine recently.

A revival in exports, on the back of a strong global economy, is also helping. After two years of contraction in 2014-15 and 2015-16, exports grew by 7.80 percent in 2016-17 and are expected to grow by 15 percent this fiscal year. That will still be far lower than the 21 percent expansion during the high growth period of the 2005-11 period.

Average capacity utilisation, at 71 per cent, is way below the threshold that triggers a broad-based recovery. Also, some sectors, such as power, telecom and mining, which are typically capital intensive, are still deleveraging.

“Investment takes place all the time. Just that it needs to grow faster to generate a higher pace of growth,” says DK Joshi, Chief Economist at Crisil, adding, “full-fledged growth is unlikely under the present circumstances.”

The numbers seem to support his argument. Revenue growth of listed corporates in Q2 of FY18 stood at 9.5 per cent. In comparison it was at 32 per cent in Q2 of 2007-08, when the economy grew at over 9 per cent.

It appears that Jaitley found it prudent, politically and otherwise, not to offer major incentives such as an across-the-board cut in corporate tax and instead is allowing some of the government’s significant recent measures, such as GST, Bankruptcy Code, relaxation of FDI rules and recapitalisation of banks, to work their magic and boost investor sentiment, private investment and thereby economic growth.

But by doing so, he is ignoring the advice of Chief Economic Adviser Arvind Subramanian, who has characterised the investment slowdown as “deep” and opined that without a clear and urgent agenda, the revival will be slower and shallower.

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