Recovery in India's investment cycle still far away?

Forget about `achhe din' coming to your doorstep any time soon, some leading voices that influence capital markets, said in unison Tuesday. It is perhaps to spook the Modi government just as it prepares to celebrate one year in office.

Country's top rating agency and economy think tank Credit Rating Information Services of India Limited (Crisil) said the recovery in the investment cycle would not be happening at least in the current financial year, and the government, despite some brilliant house-keeping measures, is ill-equipped to do anything either on the fiscal or monetary front.
Investment banker Ambit Capital went a step further suggesting that the clean-up drive initiated by Prime Minister Narendra Modi would actually pull down the economy, down from 7.5% in 2015-16 expected earlier to about 7% now.

The global brokerage house Macquarie said the mismatch between "market's expectation and on-the-ground reality" would continue in the near term and that legacy issues of land, labour and capital, and restrictive regulatory and legal regime cannot be dealt with overnight and a turnaround will happen with time.

The combined wisdom of the trio pulled down the market with the Sensex failing to support the otherwise positive sentiment as the market dipped to negative range in the last one-and-half hour of trade.
But beyond scaring the investors, the commentaries put a serious question mark on ability of the government to deal with short-term concerns like revival of consumer spending and investment cycle even as its flaunts long-term goals - Make-in-India, bringing in transparency in the way government operates - steps whose real benefits are unforeseeable.

"A study of the CNX 500 companies in 2014-15 shows that lack of demand constrained private corporate investments, which is true for half of the companies that underperformed. It wasn't so much due to policy. So, revival in corporate investments would be elusive in 2015-16 as government don't have instruments to fire demand. The root cause is weak demand. And even if demand revives it would have an impact on revival in investments but with a lag. So we see private corporate investments reviving only in 2016," Dharmakirti Joshi, chief economist, Crisil, told reporters during a teleconference while launching its critical report titled, 'Modified Expectations.'
This leaves the responsibility of reviving the economy on the shoulder of the consumers, who thankfully have more money in hand.

"The revival, when it happens, would be consumption led with some mild support from lower interest rates," Joshi said, adding that Crisil still expects the monsoon to be normal, which along with expected rise in savings because of lower food bill and fuel prices would push up consumption.

The government, meanwhile, is not expected to contribute much. "Since the government came to power, it has not been able to use the monetary and fiscal instruments because of the legacy issues," he said.

"There is no monetary and fiscal bazooka at hand, which is also because of the legislative mandate to bring down fiscal deficit. And monetary policy turned mildly favourable only this year. In other words, there is little that can be done to engineer a quick revival in demand," the report said.

This has kept corporates away from making fresh investments while the government is just creating enablers for growth like energising the bureaucracy, fast-tracking decision-making, and enhancing the ease of doing business but not doing enough to push demand up in the short term.

Many of government's anti-corruption moves are in fact scaring away investments, said Ambit in its report.
"Our discussions with major power, infra, metals and mining companies suggest that none of them are in any rush to invest. In fact, some of them are taking the point of view that they will consciously hold back capex. We have already heard about promoters of several prominent small-midcap companies who have taken tax residentship abroad in the past few weeks. Also, a significant proportion of white collar professionals working in India for MNCs are contemplating leaving the country," the Ambit report points out.