Macros may be sound, but chinks — corporate bottomlines, NPAs and falling exports — cannot be ignored
Fiscal 2016 has been a fairly confusing year for us. We are the fastest growing economy in the world, a view reiterated by all global agencies. There has been a lot of praise for the policies invoked by the government.
A number of indicators show that things are moving forward. Yet there are disturbing features that engender scepticism. Hence, there is need to build a balance sheet for the economy to clearly separate the winning and pain points.
Plus points
On the assets side, the first thing is that growth in GDP has held up and will be marginally higher than that in FY15. While this is a distance from the 8 per cent plus rate we had hoped for when we started the year, a stable rate of 7.5 per cent is assuring.
Second, industrial growth has been higher than last year and growth between 4 and 5 per cent seems possible, aided by a combination of revival in household demand and infra investment in roads and railways, topped with a statistical low base effect.
Third, the Reserve Bank of India has lowered interest rates by 75 bps this year which is indicative of the fact that it is happy with the inflationary situation: the way ahead is clearly downward.
Fourth, the current account deficit is quite well placed at 1.5 per cent of GDP, which is one reason the current global disturbances have not created the panic reminiscent of 2013 when the Fed was supposed to announce its QE tapering programme. Related to this development is the fact that the import bill is under control, with both oil and gold being lower. A bit of luck on the global economic scene front has kept the oil bill under control while several attempts at dissuasion have controlled to an extent the import of gold.
Fifth, the government’s subsidy bill has been controlled with a combination of luck as well as better administration through rationalisation. And lastly, we continue to draw healthy FDI flows despite the global disturbances.
Troubling liabilities
The liabilities side does raise concern. The first concern is that agriculture remains a non-performer. We work on the assumption that we have never had two successive subnormal monsoons, and are caught offguard when it happens. While we have reacted to a specific crop crisis, little has gone in to prevent one from happening. Such myopia has been witnessed over the years.
Second, credit growth is low as companies are not borrowing. While there has been some substitution from the commercial paper market for working capital requirements and the bond market for long-term finance, such borrowing is concentrated in the financial sector. Most of the growth has been in the retail area. Investment has lagged in manufacturing with the average capacity utilisation rate being around 70 to 72 per cent. This also indicates that infra investment in the private sector is yet to take off.
Third, the same is reflected in the gross capital formation rate which has been coming down over time with Q2 witnessing a decline from 28.9 per cent in FY15 to 28.3 per cent in FY16.
Fourth, our exports have been declining — this is cause for worry. It indicates that our goods are not competitive as the real test is what happens when the global economy slows down.
While our focus through policy has been on providing sops on imports, tax holidays and better administration, the medium-term goal should be on changing the composition so that we can increase exports. The decline in the rupee, to the extent that it helps, has been comparatively too weak to make an impact as the rupee has performed better than other competing currencies.
Fifth, the corporate sector’s performance has been disappointing, with three successive quarters of decline in profits. While sales growths have been positive and margins have been retained, stress has developed in terms of debt service and profitability.
Sixth, the banking system which is being addressed through appropriate policy measures by the government and the RBI is bogged down by high nonperforming assets and low capital. There has not been much progress here and while the third quarter results are coming in, it is unlikely that either the fifth or sixth concerns are going to be reversed.
Finally, FPI flows into both equity and debt so far have been very low so far till December, at minus $4.2 billion and plus $0.9 billion, respectively.
Some discomfort
On the borderline there are issues that look good but still cause discomfort. First, CPI price inflation has come down to the 5 to 6 per cent range but looks unlikely to ever go to the 4 per cent mark on a sustained basis.
Second, WPI inflation, though in the negative, has squeezed the pricing power of corporates. If input costs have fallen, so have the prices of final products.
Third, while the fiscal deficit has been targeted at 3.9 per cent and will likely be achieved, there is some apprehension on the quality given that the disinvestment programme will not work and expenditure cuts may be invoked.
Putting all these entries together, a dispassionate view would be that there is still a lot of work to be done. What we have attained this year is just about a stable performance with probably an upward bias for some variables. However, areas that require fundamental changes need to be addressed more resolutely in FY17.
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