‘Short-term hurdles ahead, but India will sail through them’

The government has reduced the corporate tax rate and has taken steps to improve the ease of doing business, but the private sector still seems to be risk-averse. Why?

Private sector investments are beginning to pick up. If I look at the second-quarter manufacturing survey that we put out, 61% of the respondents said they have produced more in that quarter than before. What is interesting from the investment perspective is that 70% was the average capacity utilization. Generally, it is assumed that capacity utilization needs to hit about 80% before companies start investing in expanding capacity. If we break the 70% average down, sectors like auto and auto components are operating at 90% capacity. Therefore, it is no wonder you see announcements about capacity expansion. The 70% average capacity utilization also covers sectors which are at 50-60%. That is where capacity utilization needs to go up before investments can happen.

The second point which is heartening is that 40% of respondents said they want to expand capacity by at least 15% in the next six months. What is detracting capacity addition in some sectors is that capacity utilization is not enough to warrant expansion.

Are raw material costs a worry?

Ninety-four percent of respondents said they had seen an increase in production cost in Q2 (September quarter). That is obviously not ideal to be committing to an expansion. But when the manufacturing survey for Q3 comes out, you will see the trend starting to reverse. With (prices of ) commodities and oil cooling off, you will see production costs starting to come down. You will see capacity utilization being a little better, and that would lead to more commitments of investments.

Investments are already happening. If I were to tell you about the value of private sector capex projects tha have been announced, in Q2 of FY23, it stood at ₹3.3 trillion. In Q2 of FY22, it was at ₹2.7 trillion, and in the same period of FY21, it was at ₹1.2 trillion. FY21 was the middle of covid. In FY22, we were just starting to come out of covid, and today we are almost out of covid. There has also been some sort of private investment by stealth. In the case of nearly ₹8 trillion of capacity, which was either under-utilized or unutilized, given that it was in NCLT, ownership has changed hands, and these assets are now being put to productive use. This is also unlocking capacity. If you look at brownfield and greenfield investments, it is more than a trickle now.

Will the promise of a new investment cycle survive the global headwinds next year?

The impact of monetary policy tightening is seen with a lag. You will see, to some extent, aggregate demand being affected next year, which is why if you look at the growth forecast globally, IMF said it would decline from 6% (in 2021) to 3.2% (in 2022). We have to be conscious of the fact and accept that there will be short-term turbulence, but India is better prepared than it has ever been to ride the short-term turbulence and take corrective measures.

Is raw material supply still a problem area for manufacturing sectors?

If you look at metals and minerals, there may be certain areas where there is some concern. For example, coking coal and metallurgical coke prices have gone up substantially because of a lot of demand, but supply chain disruptions etc. That is cooling off. Thermal coal (the price of which) had gone up significantly and has cooled off. The government has put superlative efforts into boosting thermal coal production and minimizing imports. Other than that, I am not really aware of any significant issues relating to supplies.

Finance minister Nirmala Sitharaman recently highlighted the delays that small businesses face in getting their dues from large corporations. So what is your message to your members?

This is something that has been raised in the past as well. As far as I am aware, first of all, there is a law relating to MSME payments which everyone has to strictly abide by. I think all of us do that. I do agree that MSMEs are vulnerable on this front, and a lot of corporations must be conscious of the MSME component of their supply chain and see that payments are not withheld for no reason. Other steps can also be taken. I fully support the finance minister’s point that large corporations have to be conscious of MSME vendors and the MSME part of the supply chain and be fair to them.