Fresh investments to remain muted as slowdown continues

Conserving cash new India Inc mantra

With the Reserve Bank of India (RBI) keeping its key rates unchanged, India Inc leaders said they do not expect the investment cycle to revive in the near future — especially for the capital-intensive sectors. India's bank rates are already among the highest in the world which is making it easier for foreign companies, who borrow abroad, to buy out stressed companies while local companies suffer, say chief executive officers (CEOs). 

Besides, the demonetisation and goods and services tax (GST) has already broken the backbone of many key sectors such as textiles and real estate and a rate cut, at this juncture, would have helped many companies, they say. Capacity utilisation rate is down to around 75 per cent, thus making corporates wary of investing in new capacity. Firms are also preferring to conserve their cash till the GST’s teething troubles are over.

“For India, a higher trajectory of growth is a must. For this, we need positive cues and from that perspective, this is an opportunity missed. We welcome the ‘pause’ but the positive cue should come sooner rather than later,” said V S Parthasarathy, group chief financial officer (CFO) of auto major Mahindra & Mahindra.

CEOs have reasons to worry. The RBI said on Wednesday the manufacturing sector, the dominant component of industrial gross value added, grew by only 1.2 per cent — the lowest in the last 20 quarters. “The mining sector, which showed signs of improvement in the second half of 2016-17, entered into contraction mode again in Q1 of 2017-18, on account of a decline in coal production and subdued crude oil production,” the RBI said in its assessment of the economy.

The index of industrial production (IIP) recovered marginally in July 2017 from the contraction in June on the back of a recovery in mining, quarrying and electricity generation. But, manufacturing remained weak. In terms of the use-based classification, contraction in capital goods, intermediate goods and consumer durables pulled down overall IIP growth. In August, however, the output of core industries posted robust growth on the back of an uptick in coal production and electricity generation. 

“With elections in five key states coming within one year and general elections soon after by mid-2019, the chances of any corporate investment revival is bleak. We have to wait for at least two more years,” said a CEO in the manufacturing sector.

It’s not only the manufacturing sector. The real estate sector and exporters are also up in arms because of the twin impact of the demonetisation and the GST roll-out hitting their businesses hard. “The RBI listed the rising input costs as a downside risk to the economy but has done precious little for helping the manufacturing and exports,” said EEPC India Chairman T S Bhasin. Indian exporters are suffering from the “twin challenge” of a rising rupee and GST-related disruptions, affecting their cash flow, he said.

The real estate sector, which saw its new projects taking a hit and no takers for old ones, said an interest rate cut would have encouraged customers to take loans and buy new homes. “A rate cut now would not only have provided much-needed cushion to the economy, but would have also added thrust to the government initiatives on affordable housing. The real estate industry is already under immense pressure owing to rise in input costs which have put severe strain on profitability,” said Surendra Hiranandani, chairman & managing director, House of Hiranandani.