Building blocks being put in place to raise India's potential-growth rate; Investment cycle unlikely to restart soon; growth recovery will be a slow process
CRISIL released 'Modified Expectations', a report evaluating the economy-related performance of the Narendra Modi-led government as it completes one year in office.The report assesses India Inc's performance in the first nine months of fiscal 2015 using unique metrics of demand, debt and policy. The findings belie some popular narratives. It highlights how the government is putting in place building blocks that will improve India's crucial potential-growth rate, and explains why it will take longer than expected for the investment cycle to kick-start.
CRISIL analysed the results of 411 companies from the National Stock Exchange's CNX 500 index (excluding those from the BFSI and oil & gas sectors), which together account for 90 per cent of the market capitalisation of the bourse. We compared revenue and operating profit growth with nominal GDP growth (it was 12% in 2014-15), which showed that 69% - or 285 companies out of 411 - underperformed.
Says Prasad Koparkar, Senior Director, CRISIL Research: Our findings are telling. For more than half the companies that underperformed, the main obstacle was poor demand. That flies in the face of the refrain that policy is the biggest bottleneck. Policy was only the No. 3 factor according to our study, affecting just 15% of the companies analysed.
'Modified Expectations' blends CRISIL's unique expertise in macro-economy, corporate and banking research, and credit ratings to offer a 360-degree view on India. It uses four metrics to evaluate the government: What has worked so far; where are the signs of a pick-up; what hasn't worked so far; and what lies ahead.
The report underlines a host of steps that the government has taken or is taking to address constraints - specifically structural - to growth. This, we believe, will ensure that growth sustains beyond fiscal 2016. But major reforms will remain a tough task given the government's lack of support in Rajya Sabha, and the government will have to show exceptional statecraft to cobble up consensus to pass crucial Bills.
Given this, CRISIL believes growth is on a slow grind up in the short term, and will touch 7.9% in 2015-16 if monsoon is normal; else it would flat-line at 7.4%.
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Says Dharmakirti Joshi, Chief Economist, CRISIL: The government can't push demand up in the short term because there is no monetary and fiscal silver bullet. We expect private consumption to pick up only gradually this fiscal, which, in turn, will provide some impetus to demand. But it won't be enough to lift extant capacity utilisation to levels where the private corporate investment cycle needs to be kick-started again. A meaningful recovery in capex is not seen till fiscal 2017.
In the interim, CRISIL believes the government has to pick up the gauntlet and try to push the investment cycle through public investments. The Union Budget for the current fiscal does propose a more than 50% jump in public spending in infrastructure.
On the legislative side, consensus is necessary to push through legislations on Goods & Services Tax and land - without much dilution. This will test the government's resolve and statecraft, but they are critical building blocks that will raise India's 'potential-growth' rate.
We also look forward to steps that re-kindle agriculture growth and ameliorate distress in farms. India badly needs durable solutions to improve farm productivity and the government needs to sustainably address distress through crop insurance schemes rather than loan waivers.
The budget for the current fiscal had announced a lot of reforms with far reaching implications for infrastructure, financial sector and taxation. Progress on these will be a key monitorable.
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