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Poor Demand, Not Policy, Biggest Issue For India Inc: Crisil

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Poor demand is the biggest challenge and not the policy issues that Indian companies faced during the first year of Narendra Modi's government, rating agency Crisil said in a report on Tuesday.
The Crisil report, titled as "Modified Expectations", which evaluated the new government's performance as it completes one year in office, assessed India Inc's performance in the first nine months of fiscal 2015 using unique metrics of demand, debt and policy.
The report, which analysed the results of 411 companies from the National Stock Exchange's CNX 500 index, also highlighted how the government is putting in place building blocks that will improve India's crucial potential-growth rate and why it will take longer than expected for the investment cycle to kick-start.
Crisil's analysis of the results of CNX 500 index companies, excluding those from the banking, financial services and insurance (BFSI) and oil and gas sectors, which together account for 90 per cent of the market capitalisation of the stock exchange, compared revenue and operating profit growth with nominal GDP growth. It showed that 69 per cent or 285 companies out of 411 underperformed.
"For more than half the companies that underperformed, the main obstacle was poor demand. That flies in the face of the refrain that policy is the biggest bottleneck. Policy was only the No. 3 factor according to our study, affecting just 15% of the companies analysed," said Prasad Koparkar, senior director, Crisil Research.
The report underlines a host of steps that the government has taken or is taking to address constraints - specifically structural - to growth. This, we believe, will ensure that growth sustains beyond fiscal 2016. But major reforms will remain a tough task given the government's lack of support in Rajya Sabha, and the government will have to show exceptional statecraft to cobble up consensus to pass crucial bills, he added.
Crisil believes growth is on a slow grind up in the short term, and will touch 7.9 per cent in 2015-16 if monsoon is normal; else it would flat-line at 7.4 per cent.
"The government can't push demand up in the short term because there is no monetary and fiscal silver bullet," says Dharmakirti Joshi, chief economist, Crisil.
"We expect private consumption to pick up only gradually this fiscal, which, in turn, will provide some impetus to demand. But it won't be enough to lift extant capacity utilisation to levels where the private corporate investment cycle needs to be kick-started again. A meaningful recovery in capex is not seen till fiscal 2017, he said. 
In the interim, according to the rating agency, the government has to pick up the gauntlet and try to push the investment cycle through public investments. The Union Budget for the current fiscal does propose a more than 50 per cent jump in public spending in infrastructure.
On the legislative side, consensus is necessary to push through legislations on goods and services tax and land - without much dilution. This will test the government's resolve and statecraft, but they are critical building blocks that will raise India's "potential-growth" rate, the report said.
"We also look forward to steps that re-kindle agriculture growth and ameliorate distress in farms. India badly needs durable solutions to improve farm productivity and the government needs to sustainably address distress through crop insurance schemes rather than loan waivers," the Crisil analysts said in the report.
The Union Budget for the current fiscal had announced a lot of reforms with far reaching implications for infrastructure, financial sector and taxation. But, progress on these will be a key monitorable, the report concluded.