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BW Businessworld

Critical To Ramp Up Factory Output

Contraction in manufacturing data coupled with falling investment numbers pose stiff challenges to the health of Indian economy

Photo Credit : Bloomberg

India’s manufacturing sector accounts for approximately 16-17 per cent of gross domestic product (GDP) and provides a significant multiplier to the economy in terms of output and employment creation. Each additional dollar generated by the sector has the potential to create 2-3 jobs in the economy. Globally, India is the sixth largest manufacturing nation and the sector has been growing at 6-7 per cent annually. To achieve the target of achieving $1 trillion by 2025, manufacturing growth needs to almost double to about 12.5 per cent annually, something both ruling party and the opposition unanimously agree. However, achieving this target is a tough task in the current scenario.

For Surja Singh, a 46-year old trucker from Faridkot district in Punjab, ferrying goods in his truck is no longer a viable business due to falling truck rentals. Consistent slide in the sales of consumer durables, FMCG and general merchandise over the past several 1uarters coupled with rising cost of diesel, among other facts, is also making the trucking business a big challenge. Move a 1,500 km from Punjab, Bhola Paswan, a 34-year-old employee at a prominent car dealership network in Jharkhand is fearing job loss in the coming months. “More than half of the vehicle sold in rural markets are on finance. Now credit seems to have dried out leaving more unsold inventory in the showrooms. Poor sales means very soon our salaries will be impacted,” says Paswan.

Fresh data from the project tracking database of the Centre for Monitoring Indian Economy (CMIE) shows that the investments going towards capital expenditure fell to a 14-year low for the quarter ended 31 December 2018. “Indian companies announced new projects worth Rs 1 trillion in the December quarter, 53 per cent lower than what was announced in the September quarter, and 55 per cent lower than the year-ago period,” the data said. The sequential decline in capex announcements was led by a sharp decline in new project announcements by the private sector. New private sector projects fell 62 per cent in the just-ended December quarter compared with the September quarter, and 64 per cent compared with the December quarter of FY18.

According to the CMIE data, the new public sector projects also declined compared with the September quarter of FY19. Fresh investment announcements in the public sector fell 37 per cent on quarter and 41 per cent on year to Rs 50,604 crore – the lowest level since December 2004. “The decline in fresh investments was across the board, with all major sectors witnessing a fall,” says a senior economist.

To a layman, these numbers may appear to be disjointed and perhaps isolated. But when one looks at the bigger picture, particularly of the Indian economy, these data points are the latent challenges waiting to hit the central government post General Elections 2019. BW Businessworld will be red-flagging some of the worrisome areas and future challenges in this special report covering issues and challenges facing the manufacturing, agriculture and other aspects of the economy.



Auto Crisis
According to the Indian Foundation of Transport Research and Training (IFTRT) truck rentals fell by 10-12 per cent for November and December 018 leading to a steep fall in fleet utilisation, which already has been burdened with indiscriminate fleet expansion of high tonnage goods carriers across all segments. “With the dull mood persisting in the manufacturing sector, truck sales would remain tepid in this quarter and negative growth may extend up to September 2019,” says S.P. Singh, senior fellow and coordinator, IFTRT. Truck rentals/retail part-load freight charges have been tumbling since November 2018 due to steep drop in manufacturing growth. Full round trips have fallen by 15-20 per cent in the last 10 weeks including during the first half of January, IFTRT stated. What does this mean? Essentially more trucks are chasing lesser cargo. “The truck freight market is in a disarray and stakeholders are waiting for a revival,” says Singh. Trucks are the lifeline of goods ferried across the length and breadth of our country. Any impact on its financial health pretty much indicates troubled economy, say experts. And staying with trucks, the NBFC crisis, which was triggered by the crisis at Infrastructure Lending and Financial Services (IL&FS) has hit the auto sector very badly. The Society of Indian Automobile Manufacturers (SIAM), the industry lobby, has written to Finance Secretary A.N. Jha about the continued decline in sales from the lack of credit. Why is this important? More than half the vehicles sold in rural markets is financed by NBFCs. With falling auto sales, dealers have been left with more inventory, which means they need more working capital from NBFCs –which is either not available or comes with demands for more collateral. On the face of it, several large auto companies will not confess the magnitude of the distress in auto sales in the hinterland but privately they concede of a crisis, which has spiralled out into reduced production of vehicles and job losses at plants.

Overall, 2018 did not go down as a great year for the passenger vehicle segment where the domestic passenger car sales rose by 6.05 per cent to over 2.55 million units. The rising fuel prices in the second half also led to a drop in volumes and the festive season too didn’t bring in any cheers.

Consumer Goods Under Stress
Another indication of stress in the manufacturing sector is reduced demand for consumer goods. Take a look at the performance of listed consumer durable stocks. There are nearly 20 consumer durables stocks that are listed on the domestic stockmarket. And almost all of them have fallen anywhere between 5 per cent and as high as 65 per cent from their 52-week highs in 2018. Most of them are small-cap or mid-cap stocks and their poor performance was in line with the crash in small-cap and mid-cap (SMC) segments explains G. Chokkalingam, founder and MD of Equinomics Research & Advisory. “In the short term, the industry is likely to face some weakness,” says Chokkalingam. “Having lent large sums as consumer durables loans over the past couple of years, banks seem to be shying away from them, possibly fearing delinquencies. Outstanding loans to the segment dropped sharply by 82 per cent year-on-year to Rs 3,225 crore on 28 September 2018,” he adds.

The consumer durables sector basically hold a solid outlook for the long term because of a number of reasons including rapid urbanisation, growing per capita income, rising temperature, increase in pollution levels, evolving consumer lifestyles among others that favour the growth of the consumer durables industry. There are some green shoots too. Recent changes in taxation on consumer durables are also throwing up some opportunities to this industry. In July 2018, many durables such as hair dryers to shavers, mixer grinders, vacuum cleaners, refrigerators, washing machines and small televisions were shifted from 28 per cent to 18 per cent GST (goods and services tax) slab.

“The forthcoming General Elections will also augur well for the industry – as anticipated loan waivers for farmers in many states could improve their appetite to buy consumer durables. A substantial correction in the stock prices provides good opportunity to buy select consumer durables stocks in the New Year for long-term wealth creation,” says Chokkalingam.

Issues Facing Infrastructure
The Infrastructure sector has been going through acute financial and operational stress since availability of credit is drying up. While banks (both public and private) are taking a cautious approach towards fresh investments in the infrastructure sector, private sector investments, too, are witnessing a major slowdown. In this situation, it is essential to work out ways to increase the spectrum of investors interested in infrastructure. It should be noted that India faces a deficit of at-least $70 billion per annum (2015 prices) in infrastructure financing.

Experts suggest that once the new government is in place, steps should be taken to allow infrastructure companies, public and private, to issue tradable zero coupon, long term tax free infrastructure bonds based on strict credit rating criteria by bringing an amendment to Section 10 of the IT Act.

“The government should work towards creating a dedicated window for infrastructure within the overall ceiling for foreign portfolio investors in corporate bonds,” says a senior expert handling the infrastructure portfolio for a leading industry lobby. “Such measures will enable channelisation of domestic and household savings towards infrastructure and incentivise long term capital, that is, the pension funds, sovereign wealth funds and insurance companies to invest in infrastructure. They will also enhance funding for viable infrastructure projects by credit enhancement, takeout finance and other alternative financing mechanisms,” he adds.  

Financing urban infrastructure remains a big challenge as well. Urbanisation is expected to continue increasing the demand for urban infrastructure such as roads, metros, waste management facilities and water supply. Increasing expectations from an aspirational population is key. Experts are batting for the creation of sector-specific asset reconstruction companies as done in Sweden.

Housing Sector Woes

Housing sector remains under duress despite a slew of reforms undertaken in the past couple of years. The National Real Estate Development Council (Naredco), country’s largest real-estate developer’s body, has urged the Centre to rationalise the GST rate on the under-construction properties, by bringing it down to 8 per cent (with land abatement) from 18 per cent (with land abatement).

“The real estate sector is passing through a difficult phase because of some harsh, though progressive, regulatory and financial reforms such as demonetisation and RERA. A number of measures suggested by Naredco will help address the concerns of the industry to a large extent,” says Niranjan Hiranandani, President, Naredco. It also recommended promotion of rental housing and improvement in effective rate of return from rental housing through tax incentives, he adds. The real estate body has also demanded measures to improve liquidity in the system.

“After RERA, the requirement of product liquidity has gone up by three times because 70 per cent of the money is escrowed in the account and 30 per cent can be used. So, the surplus from the project cannot be used on another project. Therefore, the amount of the liquidity required has gone up,” says Hiranandani. In the last two years, the liquidity crisis has been met by the funds coming from non-banking finance companies (NBFCs). However, after the IL&FS disaster, developers are in a quandary and with NBFCs in crisis, the liquidity position is not improving, he says.

It is important for any political party that wants to rule the country to address issues and challenges facing the manufacturing sector has there tends to be a big ripple effect across sectors. The time for rhetoric is gone, and the time for action is slipping with each passing day. We hope that good days should come at the earliest for people like Surja Singh and Bhola Paswan because they face the brunt of bad economics, the decision on which are taken in the comforts of air-conditioned offices located in Lutyens’ Delhi.


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