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Sandeep Bamzai

Sandeep Bamzai is a media professional of standing and repute having held editorial leadership positions right through his 32 year career. Visiting Fellow at think tank ORF, he is currently writing a book for Harper Collins on the Role of the Indian Pri

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Disequilibrium | India's Stress Test

If India is to remain insulated from global volatility and currency fluctuations, then it has to build a moat around itself and act independently. Let us not obsess over legislation anymore

Photo Credit :

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The new year has got off to a lousy start. If one were to diagram the source of the pain, then it is clearly China which is causing upheavals in equity markets across the globe. Despite crude tanking almost daily, there is no respite from market volatility. For years, the expression still waters run deep proved to be a synonym for the Chinese economy, since nobody had a clue on solving the jigsaw. Controlling a so called free market economy is fraught with risk and in China's case, even the free market was a controlled economy, the levers with a few select Party apparatchiks. Now that, all this is unravelling and furiously at that, no one knows the extent of the pain. A new circuit breaking mechanism was tripped for the second time this week halting trading, almost in parallel, it allowed the yuan to fall fastest in the last five months, signalling a recalibration of risk. If China is aiming for a competitive devaluation of the yuan to help its ailing exporters, then one doesn't know where the bottom is. Fear once again stalks the markets, the concept of decoupling alien. On Thursday, the BSE Sensex closed below 25,000 and other global indices looked worse for the wear after the beating they have got this week.

Once again India needs to kickstart its own economic engine which appears somnolent. Rural consumption is still not showing an uptick and the slow pick up in capital expenditure is containing the pace of recovery. Morgan Stanley in its latest India Economics report says: India is one of the few emerging market (EM) economies which have completed the painful macro adjustment process and is now on the path of recovery. We believe the recovery in GDP growth in this cycle will be domestic demand-driven, led by improvement in urban consumption, public capital expenditure and foreign direct investment. However, the pace of the recovery is constrained by weak external demand conditions and slow growth in private sector capex.

Factors holding back pace of recovery in domestic private corporate capex
: MS believes that four factors are weighing on the private corporate capex recovery, namely, (i) slowdown in external demand leading to low capacity utilization, (ii) PPI deflation adversely affecting corporate sector profitability, (iii) high real rates for the leveraged corporate sector, and (iv) weak balance sheet of banking sector.

What is key to a revival in private corporate capex? The recent trend in CMIE data for private projects under implementation has shown a tepid increase; however, the challenges facing private corporate capex are likely to keep the recovery slow. In our view, while we expect the government to continue to take policy and regulatory measures to remove supply-side constraints on a pickup in the investment cycle, a strong revival in private capex would also require a reversal in global factors including exports and deflationary pressures. Given our view of only a marginal recovery in global growth to 3.3%YoY in 2016 from 3.1% in 2015, we believe that global factors will continue to constrain the pace of private corporate capex recovery in the next 9-12 months.

Where does that leave India? Bumping up domestic demand which in turn will lead to a pick up in consumption and investment cycle revival are the twin pronged strategy for India to get over the hump. Unfortunately, these twin themes have dominated the narrative over the last 18 months. In fact, as soon as the BJP Govt. came to power, these were imperatives laid down before them. Decelerating rural demand, withdrawal of tax benefits and weak discretionary spends would continue to impact the consumption story. Centrum Broking in its latest report says - Rural demand continues to impact revenue growth: Revenue growth for large MNC FMCG companies would remain weak on back of decelerating rural demand and economic slowdown. Further the withdrawal of tax benefits would also impact net sales growth. I am happy to note that the Prime Minister has taken cognisance of the necessity of 'transformative ideas', and putting an end to recycling of old ideas and consigning gradualism and incrementalism, something that this column has been advocating vociferously.

Significantly, there is no respite on the earnings front either, a windsock for a revival in India Inc. Here again the news is not good. Centrum Broking argues that, "Muted credit growth and margin pressures, following reduction in base rate by 25-30bps across banks, is set to impact NII growth. Further, while fresh slippages are expected to moderate sequentially, provisioning requirements are likely to remain high following RBI directive towards recognition of stressed assets. Profitability, under such situations, will remain severally impacted."

In all this depressing news, it becomes incumbent on the Government to use its executive authority and initiate a process of reform which is far reaching. If India is to remain insulated from global volatility and currency fluctuations, then it has to build a moat around itself and act independently. Let us not obsess over legislation anymore. Most macro economic indicators and parameters remain stressed. Weak bank credit (coupled with intense competition therein) and decline in SME ratings (following reduction in subsidy scheme) have remained unchanged QoQ putting added pressure on the economy.

Take executive decisions - the long pending resolution of the Sriperumbudur Nokia facility which is on the PM's radar but has seen no action. Resolve tax issues with Tamil Nadu govt. and put the facility to bid and show in earnest that Indian means business as far as Make in India is concerned instead of holding a meaningless jamboree in Mumbai in mid February. Disinvest perennially sick ITDC hotels, again put them on the block, show intent. Go ahead with the reverse merger of MTNL with BSNL and create a telecom behemoth which can actualise the dream of digital India. Use it as an instrumentality. Take 25 PSU units with decent assets and an ability to turnaround which have seen 10 years of consecutive losses and begin the process of strategic sale. I can provide many more examples. More than anything else, the government cannot afford to sit on its haunches, it needs to be proactive and dynamic. It needs to pursue the quarry and play hunter in a determined manner. Do away with retrospective taxation issue once and for all, don't postpone them. Investors don't like surprises, deal with problems don't push them into abeyance. Look at Raghuram Rajan, he is no longer shy of the elephants and camels in the room, he knows that there are rising non performing assets which act as a great risk to the banking system, he is ready to tackle them on a war footing. The time to be shy has come and gone, the honeymoon, one of the longest ever is over, the time to pick up the economy from the boot straps is here and now.

Getting a bloody nose on black money, land acquisition, labour reforms, it needs to articulate its economic agenda for the next few years. What does it want India to be economically and how will it get to the milestones is what India awaits answers on.

Most importantly stop being smug about the fact that we are doing better than others. Get out of that rut.


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disequilibrium reforms growth emerging markets capex