Green shoots of economic recovery clearly visible

While most are disappointed by the lower than expected Index of Industrial Production data that came out on Friday – IIP stood at 2.7%, lower than the market expectations of 4.1% – what was missed by most is that the green shoots or recovery are clearly visible, and activity is now clearly on in some segments of the economy. These are the initial green shoots that should percolate down to better growth across segments, going forward. These segments are:

Power Transmission and Distribution segment – This segment is now seeing strong recovery after a period of slow growth over the last 3-4 years. The main issue that the segment faced, as with most other infrastructure segments of India, was aggressive bidding by non-serious players which led to lot of incomplete projects. This, along with green issues related to project clearances and land acquisition, led to problems in the segment. These things are now behind us and we are seeing strong growth traction in most large companies in this segment.

Roads – The roads sector is seeing the biggest traction today. The project award activity as well as on-ground activity in the roads segment has picked up substantially. Some of the key equipment suppliers to road construction companies are indicating that sales may double in the current year.  With the government shifting its focus away from awarding projects on a PPP basis -- which led to over aggressive bidding and then poor execution -- the current shift towards a mix of EPC (Engineering, Procurement and Construction) and PPP is working well. Some companies that are focussed on PPP are getting orders in that segment and others that do pure EPC are also getting orders. The execution cycle from project award to financial closure and execution is also coming down. Road projects are hugely positive for the economy as they generate large employment and require a lot of inputs and machinery. The economy around the project sites also gets a boost due to increased demand for a number of products. At the current project award pace of around 9,000 kms for the year, the investment run rate in the roads sector could pick up by up to Rs 1,80,000 by next year. 

Wind and Solar Power – With the withdrawal of many tax benefits on wind projects, along with an accelerated depreciation of benefits and a slowdown in the economy, we saw investments into the wind power segment collapse to as low as 1,000 MW per annum. However, with the new government's focus on green energy, we have seen some tax benefits making their way to wind projects again. Project clearances have also accelerated in this segment, and we can see significant ordering as well as execution now. The current year is likely to see over 4,000 MW of installations, which should grow going forward. There is a huge thrust on solar power which has greater traction. I may not be very enthused by the entire strategy of importing Chinese solar equipment and installing it in India, it is something that has seen huge traction. The government is targeting $100 billion in investments in the solar power sector by 2022 -- even half will give huge traction to the economy.

Pick up in commercial vehicle sales – There has been a huge pick up in commercial vehicle sales over the last few months. This is due to two factors – first, it's a general replacement cycle after  many years of under investment; second, it's due to higher economic activity and expected recovery. Most large companies have seen a 25% plus growth in sales over the last few months, which should continue going forward. CV sales are normally a leading indicator of economic recovery. 

Pick up in government spending and good revenues – The first three months of the financial year have seen a significant pick up in government revenues. This is despite the fact that an increase in service tax was implemented only in July. The next few months’ growth figures could be even better. This can lead to two things. Firstly, higher revenues can lead to lower market borrowings, and as such reduce crowding out i.e. the availability of funds for private sector investments. This will have a direct impact on growth, because in the last two years we have actually seen the government cut down expenditure which has slowed down economic growth. The revival story becomes even stronger as improved private investments get combined with higher government expenditure. This will start reflecting in growth numbers, going forward. 
Some government schemes yet to still pick up- Activity is yet to pick up in lot of other government schemes like Swachh Bharat, toilets for all, housing for all, etc. Some companies that can potentially benefit from these investments are indicating that enquiries are picking up, with some initial orders. This should add to growth, going forward. 

Defence Orders – Lately we have seen order flows from the defence segment pick up for Indian companies on two fronts: first is the replacement of ageing non-combat equipment, and the second is with the focus on “Make in India” and order flows from the combat segment. This should also start reflecting in a pick up in manufacturing activity very soon. 

Overall, a recovery of the economy is well on the way. The list I have covered may not be exhaustive but it clearly shows a pick up in growth. Inflationary pressures are subdued and should also lead the Reserve Bank of India (RBI) to cut rates, going forward. Recovery is picking up and is all set to gain steam in the following months. 

The author is a fund manager who runs an investment advisory company. He can be reached at his website.