We are at start of good industry & services performance cycle: Subhash Chandra Garg, Economic Affairs Secy
Lets talk about the RBIs order book capacity utilisation and the inventory survey which says that capacity utilisation for most industries is at 75.2% — a two-year high. Add to that the Nikkei India Services business activity index as well, which is at 54.2. You had tweeted that it reflects a lot of optimism, a lot of business activity. Is it sustainable or is it just a one off?
It is not only sustainable, it is start of that cycle of good industry as well as services performance. What has begun in the last six to eight months is going to get carried through. There is every reason to believe that this activity will sustain. Nikkei index on both the PMI as well as the services reflected that. The composite index has also gone up. What RBI found out in the survey is also suggesting the same thing that the output gap is closing which means that there is not only more production of goods and services but possibly the time has come for investment activity to pick up. All indications are quite positive.
Was this the trigger that everybody was waiting for because so far we were seeing how the government was pushing the pedal?
A certain kind of cyclical trend was visible for the last couple of years. There was a lot of investment in infrastructure and industrials for the 2012-13 period. Then excess capacities got created. Some of those businesses went non-performing, over-capacity was created in housing segment, leading to a fall in investment in realty. It takes some time for the cycle to turn and the overcapacities to balance out for fresh investment to pick up. I think we have reached a turnaround stage for fresh investments and capacity utilisation.
Is it a secular growth that you are seeing or are we seeing a turnaround in some sectors?
Secular would mean every sector but I do not think we can say every sector has seen a turnaround. Many sectors have started moving in. Other sectors would take more time.
So, which are these ones?
It is difficult to get into specifics but housing and the real estate is one major sector where still in many parts of the country you do not have that kind of capacity utilisation and unsold inventory remains. But in some part, it has started picking up. You have seen the activity coming up in steel, cement sectors. But maybe in some of the durables, you would not see that kind of gap closing coming up. One can do this sector-wise analysis but broadly speaking, quite a few sectors have gone to that level and some may take some time to come.
We are seeing most of the earnings this season have been good so far. A lot of companies are keeping a control on their cost which could not be a factor given how oil prices are moving. Given where the rupee is headed, when do you see the earnings turnaround happening for companies across the board?
The corporates have also been cautious, controlling costs so that their profitability improves. But you are possibly hinting that when they have pricing power, it gives them better turnover in terms of final prices. It is all related to the demand supply situation. If the industry is producing more than what the demand is, they lose a bit of the pricing power and as the capacity utilisation improves and the demand is in accordance with the supply, then the pricing power comes, It will happen around that capacity utilisation and the closing output gap also.
The other fear is that once the pricing power comes in, there could be a likelihood of it is stoking inflation as well?
That is when the output gaps close and the pricing power leads to more ability in the industry to raise prices. Inflation does happen but that is taken care by the fresh investment where logic wise the fresh investment at that stage starts thinking and taking and creating additional capacity and then the same situation. If you have a situation where fresh investment comes up as soon as the output gaps close, then you may not have actual pricing power going berserk or to levels where it might hurt.
Since we were talking about how capex is reviving, there will be funding needs as well. So far, there is NPA of almost Rs 10 lakh crore in the banking system. 11 banks are under RBIs prompt corrective action. Private banks will have to do a lot of the heavy lifting. In terms of funding activity, how capable are the banks? Can they adapt to the changing situation?
Fundamentally, if savings are available for domestic investment, then only one particular funding channel should not be used. We have robust saving rates. We also have opened up the foreign savings route for FDI and others to come and therefore, I do not see overall shortage of funding available for the Indian industry and the business requirement.
The banks have had some difficulties, especially the PSB banks. But we have the corporate bond market which is increasingly becoming bigger. We also have financing through NBFCs and the mutual fund routes. A lot of financial assets are getting created there. We have robust FDI transfers and I believe the industry will not feel any funds constraint.
Funding would be there. A lot of work is being done to even turn around the PSBs and they should also be able to have growth as we go along.
Perhaps it is too early to celebrate because we are still not at the 83% level that we were back in 2011. How big are the concerns, given the global headwinds including the trade war concerms plus a volatile oil and a volatile rupee as well?
The data on oil, on foreign exchange and FPI flows show that we are reaching a stage where there is more stability. The situation today seems to be better than the situation in May or in June. July was the first month after five months when the debt flows turned positive. We have had about $9 billion of outflows in the last three months before July. This signals more stability. Of course, the risk remains even in oil prices. July has been a far more stable month. The oil prices fell, the futures today available for October and later are at much lower levels than they are.
Things can change if there are global events of an extent that can impact the stability but you can never be only pessimistic about what might happen. In the real world, a lot of good things happen along with the bad things. We negotiate and move ahead. My overall sense is that we must keep our eyes open. I do not think the situation is something to be too alarmed about.