Sunday, January 29, 2023

Inflation falls, demand low: PSUs lead capex, Pvts laggard

Shivaji Sarkar

The government having fallen short of funds presents fresh demand for Rs 4.4 lakh crore involving a fresh outgo of a little under Rs 3.3 trillion (lakh crore) to defray high subsidy costs of fertiliser, food and fuel (FFF).
Though prices slump, demand remains low, capex is led by PSUs and private remains laggards.
The Union Budget was for expenditure of Rs 39,44,909 in 2022-23, an increase of 4.6 percent over the previous year. The total expenditure for 2021-22 has been 8.2 percent over the budget estimates. The government is apologetic on the fiscal deficit and insists it would remain within the projected limit, 6.4 percent of GDP.
The Centre has raised revenues of Rs 32,000 crore from dividends from PSUS and Rs 30000 crore is acquired from disinvestments. With the shrinkage of PSUs, this income, both dividends and sales would gradually be non-existent. Private partners are also reneging as they find profits elusive. Deficits may actually go up.
Fertiliser gets the biggest chunk of Rs 1.09 lakh crore – Rs 23000 crore for P&K – phosphatic and potassic and over Rs 86000 crore for urea. Free Food dole gets additional Rs 60,000 crore for PM Garib Kalyan Anna Yojana until December but may be extended as 2023 holds elections to nine states. The programme is politically sensitive and may continue longer.
Another sensitive area, rural development gets Rs 45000 crore with an additional Rs 28775 crore for MGNREGA, though Finance Minister Nirmala Sitharaman says fewer coming for it and Rs 28775 crore for other heads.
The petroleum oil marketing companies (OMC) get Rs 25000 crore for LPG subsidy for the poor, the Ujjwala scheme.
Various infra, particularly road and rail, projects get Rs 39.4 lakh crore, largely through debts. World Bank has cautioned on debt financing the infra in difficult times if it does not boost effective demand. The exercise meant for higher GDP growth has RBI repeatedly cut it to 6.3 percent by RBI and 6.8 percent by the IMF.
There are some silver linings as retail consumer inflation falls to 5.88 percent and dramatically wholesale index falls to 5.85 percent. The WPI has been declining since August as the RBI pepped up repo rates. Deceleration in food prices is largely responsible for the lower-than-expected inflation. Food contributes 39 percent to consumer index. November was the 19th month when food at 6 percent was beyond the RBI toleration limit. Fuel, clothing and footwear are still beyond the limit.
Consumer demand has yet not risen. It eluded even the festive Dussehra and Diwali season. It led to 4 percent contraction in the Index for Industrial Production (IIP) due to 5.7 percent contraction in manufacturing. Mining grew, mainly due to 524 million tons spudding of coal, by 2.5 percent and electricity 2.5 percent. Higher electricity prices hurt. Overall consumer demand is still in a grey zone far behind the pre-covid19 level, February 2020.
In such situation, increasing the capital expenditure may become elusive. Rightly, Chief Economic Advisor Anantha Nageswaran has called upon the private sector to play greater role, and ensure that capital cost is not driven up too much. It is a difficult proposition.
The central PSUs with annual target of Rs 6.62 trillion remains the major spender that boost the economy. It has achieved 43 percent of the target so far.
The RBI in its study on capital expenditure says a total of 361 companies, which did not avail of any financing from the banks/FIs for capex projects, raised an amount of Rs 47,824 crore through ECBs/FCCBs/RDBs and 27 other companies raised Rs3,410 crore for their capex needs through domestic equity issues under the IPO route. Overall, investment plans of 791 projects were made during 2021-22 aggregating to Rs1,94,548 crore as against 576 projects in 2020-21 with investment intentions of Rs1,16,603 crore, which remained comparatively lower than the levels seen since 2016-17.
The investment climate in terms of number of new project announcements remained weak during 2019-20 and deteriorated further in 2020-21 due to covid19. Subsequently, with resumption of business activities and improved demand sentiments, the new capex project announcements showed some signs of revival. During 2021-22, 28 banks and FIs which were actively involved in project finance, reported 403 projects, significantly higher than 220 projects reported during 2020-21 as well as 320 projects reported during 2019-20, mainly due to increase in small ticket projects. Though envisaged total project cost of Rs1,43,314 crore almost doubled as compared to the record low of Rs75,558 crore in 2020-21 on the back of Covid-19 induced lockdown and related restrictions, it remained lower than the pre-Covid levels.
A Crisil study finds that a full-fledged revival in capital expenditure in the coming fiscal will push overall credit growth to over 15 percent in 2024. This is not commensurate with demand and buoyant full-fledged capex revival. RBI data shows that as on October 21, bank credit grew 17.9 percent year-on-year. Private investments will pick if there is profit possibilities.
The new Indian economy may have patches of problematic developments and the private sector may not rev up the economy. The hurried approach at privatisation hopefully would not become a critical block for the government. Still a large chunk of public sector remains, the flagbearer of Indian economy. As their role shrinks, the country could slip into myriad problems. The private sector depends more on public financing and debt mechanism. It simply means bank loans and huge write offs. Since around 2012, the banks have written off about Rs 20 lakh crore bad corporate debts. Meanwhile, debts of some large houses have spiralled and RBI refuses to name them though smaller borrowers are named and shamed.
The private players owe NHAI between Rs 31000 crore and 50000 crore for highway constructions. Similar default in other areas are not unknown. The NHAI also says that not more than one-third of the toll collections reach it. Toll collections is at Rs 40,000 crore, says Transport Minister Nitin Gadkari. It had to cancel a long stretch of road construction owing to failure of high monetisation plans.
The country is on an uneven patch and has to ensure how a non-PSU economy remains responsive.

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