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First things first

First things first

By Rajiv Budhraja:

A recent development made India Inc. to sit up and take notice. The new Minister of Commerce & Industry Suresh Prabhu plans to seek an investment pledge from Indian companies regarding their assured investments over the next few years. Laudable as it is, the step also points to the anxiety on the part of the Government to put the economy back on track.

Yet again, it has been proved that India is no longer the fastest growing economy in the world. The first quarter numbers for current fiscal have come as a rude shock. Gross Domestic c Product (GDP) growth has slipped to a three year low of 5.7% in the first quarter (Q1) of FY18. From a high of 9.2% growth in the last quarter (Q4) of FY16, the growth has been slowing for five quarters in succession.

There are quite a few areas of concern. Agriculture is hurting notwithstanding good rainfall. Against 4.9% growth in agriculture in FY17, the growth has tapered to 2% in Q1 of FY18. Capacity utilization of the industry is slipping. From 74.6% in FY16, the capacity utilization slipped to 72% in FY17 and further down to 71% in Q1 of FY18. Index of Industrial Production has come down by more than half from 5.2% in July’16 to 2.4% in July’17. All this is enough to prove that the economy has been facing headwinds of late.

For quite some time now, the economic growth has relied upon Government expenditure and Foreign Direct Investment (FDI). Private investment has remained sluggish and has gone a long way in dragging the economy down despite the fact that a series of initiatives have been launched by the Government including Make in India besides several reforms.

Amongst other challenges, stalled projects have weakened the balance sheets of corporates and public sector banks which, in turn, have affected, both, private investment and banks’ capability to lend. As a result the credit growth of public sector banks has been the slowest in recent times and stressed assets are weighing down on the growth. Unfortunately manufacturing, essential for job creation, has maximum number of stalled projects followed by power. Investment to GDP ratio has been declining.

A question being fervently asked is when will the private sector join the party? And that explains Minister Prabhu’s serious efforts to secure investment commitments from domestic firms. In fact an investment war room is being set in the Commerce & Industry Ministry. The government is understood to be keener now than ever before to help overcome the constrains being faced by the private sector.

I am not an economist by practice. However as an industry observer I certainly feel that private investment needs to be incentivized. Especially in sectors like Tyre where the industry has continued to invest against all odds. Just take a look at the unique attributes of Tyre Industry. There has been continuous decline witnessed in Gross Fixed Capital Formation (GFCF) by private sector in India as the global macroeconomic environment remains challenging. However tyre is one sector which has been steadily investing in capacity expansion and technological upgradation. In the past four to five years, tyre manufacturers have invested over Rs 40000 crore (approx. $6 bn) in India in state-of-the-art manufacturing facilities. That makes the sector stand out.

Job generation is another major worry for the Government. In that respect also, the job-generating potential of the tyre industry is huge. India has about one million natural rubber growers and another more than a million engaged in tyre industry and its rich and diverse value chain. The Industry has a wide dealer and distribution network extending to remote rural areas across the country thus creating jobs for large number of people.

As much as 15% of the revenue of the Tyre Industry comes from exports. Tyre exports from India could be propelled to another level altogether. In fact exports could be doubled in three years with policy support from the Government. The spend on R&D by major tyre companies in India has gone up three fold from 0.6% of revenue five years ago to more than 2% currently. Auto OEMs are no longer importing tyres but are using Indian manufactured tyres for not only domestic market but as export fitments too. It is unfortunate that the Tyre Industry remains one of the less appreciated success stories of Indian manufacturing.

The silver lining amidst dampening economic scenario is that a rebound is expected and India may end Financial Year 2017-18 with a growth higher than psychological mark of 7%. The reasons are not hard to come by as some of the negatives that have held up growth are poised to dissipate. For one, restocking post GST will spur industrial production, festive demand will further push sales and thereby production and Government spending in infrastructure will continue to support growth.

With Government showing its commitment to activate stalled projects and clean up balance sheets of the banking sector, the investment cycle is likely to be revived soon. However, sectors such as tyre need to be identified and incentivized, on priority, for achieving results in the short term as desired by the Ministry of Commerce & Industry.

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