There is a rising clamour for increase in capital expenditure by the public sector to kick-start the investment cycle.
Economists are unanimous that public sector spending would lead to improvement in the business environment, so that the private players can follow suit.
The government companies may begin with brownfield projects (expansion projects), spanning a few sectors of power, ports, roads, manufacturing and defence, they feel.
Most of the private sector companies are highly indebted, and are unable to invest further, experts said. The capacity utilisation of the manufacturing sector is at a low of 70%, which is discouraging the companies from expansion.
Raman Uberoi, president - ratings, Crisil, said, "The message coming through is crystal clear. As things stand, there is only one way to kick-start the all-important investment cycle, and that is through public investment. The onus is on the government to do the initial heavy lifting."
As per a report by Crisil on Tuesday, an 11% year-on-year decline is estimated in the capex plans of private-sector companies in 2015-16.
As per the report, the ability of the government to kick-start investments through fiscal measures -- especially given the additional elbowroom afforded by falling crude prices – is crucial because it can initiate the demand cycle.
Shubhada Rao, senior president and chief economist, YES Bank, said the government would need to revive demand by the creation of infrastructure.
"The crowding in concept will apply on capital expenditure wherein the government spending boosts demand for goods which, in turn, increases private demand for output sources like factories."
The government is estimated to face a revenue shortfall of Rs 87,900 crore owing to tax revenue falling short of the budgeted estimate by Rs 80,000 crore in the current fiscal, as per a recent YES Bank report. Thus the government would need to find various alternate sources of revenue to increase the capital expenditure while walking the fiscal tightrope. The government has targeted a fiscal deficit of 3.6% of the GDP in fiscal 2016.
Sonal Varma, executive director and India economist, said that fund the capex, the government needs to find renewed sources of money through hiking taxes in petrol and diesel, increase in cess, as well as asset sale in both central or state government companies, using money from cash rich PSUs.
"Special purpose vehicles can also be set up to attract global investors for long-term investments, and the implementation of GST will help expand the service tax basket, thus increasing government revenue," said Varma.
High interest rates for corporate lending is also a major impediment towards increasing the capex as the finance cost of the project rises, which may make it unviable. RBI in its monetary policy statement had noted that the fiscal deficit target will be one of the major factors influencing the rate cut cycle.
Deven Choksey, MD and CEO, KR Choksey Securities, said the ecosystem should be conducive for business in terms of low cost of funds and speedy clearances so that the corporates are induced to increase their investments.
Market experts believe that the capital expenditure cycle to revive post the increase in growth rate and fall in commodity prices subsequently increasing the tax revenues as well as reducing the subsidy burden for the government. The Central Statistical Organisation has estimated the GDP growth of India at 7.4% in fiscal 2015 and 7.9% in fiscal 2016. The rise in excise duties on petrol and diesel is expected to add close to Rs 80,000 crore to revenues in fiscal 2016, as per a YES Bank report.
Dipen Shah, senior vice-president, Kotak Securities, believes that post the start of the capital expenditure cycle by government and an increase in demand, the private sector capex will kick-start from the second half of the next fiscal as private players will increase their capacity.
The stability of rupee and the comfortable current account situation will help the companies access foreign funds.
Varma said, "The expenditure will be more in sectors that witness higher multiplier effect."
"The areas which will find increased interest from both private as well as government companies are power, ports, roads, manufacturing and defence," said Shah.
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