Are the green shoots for real?

Improvement signs visible in corporate sector, but capex cycle will revive when firms can raise cheaper equity capital

It’s a known fact that the downswing in economic growth over the last one year has as much to do with the government’s policy paralysis as it has to do with a slowdown in the capex cycle. The government might have redeemed itself in September by unleashing a spate of reforms, which have helped revive investor sentiment. But is this sufficient to induce corporate India to invest again? If some bankers are to be believed, the green shoots are clearly visible and the capex cycle reviving.

There’s reason for such belief, not only because some large companies are willing to start work on already-cleared projects, but also because there is a general understanding that the economy is set to turn around. What UPA-II has done in September is a preview of what it intends to do in the months preceding the next session of Parliament. The broad understanding given to market participants is that a few key measures on capital raising will be unleashed over the next few weeks, making life a lot easier for promoters.

For the capex cycle to revive, three major issues need to be addressed. The first is land acquisition and another is making fuel available at reasonable prices. What the government also needs to do, and which the market believes will be done, is to announce key capital market reforms, which would boost sentiment. Since the central bank isn’t playing ball, the next edition of reforms will try to make the environment benign for companies trying to raise equity capital.

There’s more promise, if analysts with their ears to the ground are to be believed. Saurabh Mukherjea of Ambit Capital believes small and medium enterprises are lead indicators of a turn in the economic cycle. Ambit hosted a call with the brass of SME Rating Agency of India and the understanding is that the ratings of Indian SMEs over the last couple of months have improved, largely because of better access to liquidity from banks at better rates.

Experts also believe non-performing assets from the SME sector should bottom out in Q2, as from Q3 onwards there would be better access to liquidity. However, banks with exposure to large corporates will see stress for another four quarters. There might not be a clear answer on whether the green shoots are for real but there’s undoubtedly activity on the ground.