Private sector investment pickup will take time: Pawan Goenka

While it is reasonable to expect India will see high economic growth, private sector investments may take some time to kick in, says Mahindra & Mahindra’s Executive Director Pawan Goenka.

Capacity utilisation across industries still averages 70-75 percent and investments are unlikely to start before demand lifts utilisation levels to 85-odd percent, he says. Other aspects like leverage and credit availability are also stumbling blocks in private investment right now. It might take a year or so for these issues to get sorted, he adds.

Speaking to CNBC-TV18 on the sidelines of the India Economic Summit, Goenka says the last 12 months have been good for India. He believes the government has put growth on priority and there are enough levers to propel growth, but it now remains to be seen if all the levers will work well together as anticipated.Below is the verbatim transcript of Pawan Goenka’s interview to Ronojoy Banerjee on CNBC-TV18.Q: People were sort of restlessly waiting for those reforms to happen that were sort of slower to come by but we have seen some big announcements coming in the last few months only. Have you seen a change in the tone and tenor about India?A: The last 12 months have been good in many ways for India. Of course, the headline is that monsoon and a good monsoon always brings smiles on face of everybody whether you are in that agriculture field or you are not. So, that certainly helps.But the way I look at it is, the year before was kind of lost year. Things that should have happened didn't happen and in the last year the government figured out how to manage the political environment and how to get the big reforms passed. Therefore, the Goods and Services Tax (GST), the big bang reform that we all have been looking forward to, finally did get pass and that in itself has created a positive mood.The change that has happened in Reserve Bank of India (RBI) and with that the more alignment between government and RBI to look to growth and that is the signal that we see in the policy rate cut of a growth focus while keeping an eye on the inflation undoubtedly and that one cannot take eyes off of. But making growth a priority seems to be what is coming out.So, if you add it all together right now India has to be sort of looking at itself sitting in a very comfortable spot. We have space in fiscal as well as monetary policy, we still have space to go another 25-50 bps if inflation continues to behave. We have consumption stimulus that is happening because of Seventh Pay Commission. We still have very high government investment on infrastructure, railway, defence that is happening.Q: So, using an auto terminology the government has now pressed the accelerator and we are on the fifth gear.A: Pressed the accelerator and all systems are running parallel in a positive direction. So, it has to do well.Having said all of that, there is still scepticism whether all of this will come together. The gross domestic product (GDP) growth of 7.1 percent in the first quarter was a bit of dampener. International Monetary Fund (IMF) has now increased the forecast to 7.6 percent, which doesn't surprise me. If you look at trade, if you look at policy reforms, if you look at the fiscal and monetary space that India has, it is reasonable to expect that India will see a good economic growth, GDP growth. But still there is some scepticism.Q: Vinod Dasari was also here just a short while back and we were talking about how the government is trying to make up for lack of private investment. But in a country where over 80 percent of investment is lead by the private sector, how long can this government do this and importantly what sort of long term effect will this have. We are seeing gross capital formation in the private sector being much below, it is about 26-27 percent as opposed to 33 percent five years ago. When do we see private sector investments also coming in?A: It is going to take some time. So, you are right that the investment cannot be dependent only on public sector, that cannot support the economy, it has to be private sector investment. There are two or three factors that are coming in the way. The biggest one in my opinion is the fact that most of the manufacturing sectors are still running with unutilised capacity and overall the figures I hear on an average is about 70-75 percent utilisation and you will start seeing investment once you reach 80 percent plus. So, if we have one more year of demand growth then we will get into a zone of where there is a need to invest in capacity. That is one factor.Second factor is leveraging of balance sheets, which is getting corrected but is still not out of what one would call a concern zone. Therefore that correction of balance sheet has to happen both at the banks as well as the industrial houses.The third factor is still there is a credit issue, that needs to be corrected. So, if these three things come together -- it will not happen overnight. I would think that we need to see one more year of correction in all three areas and then we will be ready.Q: So, we are seeing a demand pick happening with the festive season now but if this demand continues next year that is when we will those investments coming in but it is still wait and watch.A: That is correct because investments cannot happen unless there is a demand.Q: So, interestingly you are seeing capacity utilisation is still about 70-75 percent?A: On an average that is the number I hear across all industry segments together and there will be companies that are fully utilised and companies that are less than 70 percent but that is an average that is what I hear.Q: Then what happens, because with tractors you have a real pulse on the economy, monsoons have been better. Even though 150 districts are still facing drought, I am told but tractors have seen a good volume. So, overall far more optimistic from this October to December period?A: Let me connect tractor first to the last question then I will come to this one. Three years ago the tractor industry had planned for a market size of 700,000. So investments made in capacity were to produce 700,000 tractors. This year, in spite of all the growth that we are talking about, we will still be below 600,000. So, you can imagine how much extra capacity there is in tractor industry and therefore you will not see any capacity investment in the industry.Now coming back to your question, as I said at the beginning that monsoon has been about as good as it can be. People look at two percent plus or minus, that is not the headline. The headline is the special distribution, the headline is the temporal distribution. And both of them have been good. And you are talking about 150 districts being in drought but if you look at any given time even when we had 15-20 percent excess monsoon, you will still see districts under drought. What is more important is which districts. If the districts that are under drought are the districts where irrigation is very good, it does not affect.Now, which are the drought areas this time or the low rain areas -- Punjab, Haryana, Gujarat and all three states are the most irrigated states in India. Therefore the effect on that on agriculture is going to be low. So, one has to go one level deeper to see it is bad news or not.The reservoirs being very good, the storage, which bodes very well for next year because if the reservoirs are down then you will have problem that will come up next year. There have been very good late rains that we had seen in the last 3-4 weeks, which will have a very good beginning for Rabi crop.So, in the last 3-5 years I have not seen the kind of positivity that connects to monsoon as good as it is today. At the beginning of the year, I had said that India cannot afford third bad monsoon and if that happens we will all be in a very bad shape, fortunately that has not happened, so we are in good shape.Now what is your reaction to that, the reaction immediately that one sees is in how much sowing that is happening and the sowing is higher than what it was even in the best rain of 2013. How much tractor sales that are happening, in the first half of the year the tractor industry has grown by 20 percent, higher than what the most of optimistic assumptions were at the beginning of the year.If you start looking at what is happening to goods that are connected to rural economy like motorcycles, motorcycle growths have now come into double digit growth after long time. If you look at the four-wheeler, the four-wheeler growth typically would come after harvest because the first investment will be in tractor, second will be in motorcycle and third in four-wheeler. So, rural economy uptick because of monsoon -- you are clearly seeing the sign of that, there is no doubt.Q: First clear signs in four years, it is the most pronounced signs.A: In tractors.Q: So, do we expect better festive season than in the past?A: This is very hard to comment on because many sectors come into this and festive season one shouldn't look at month on month because this year festive season happens to fall in the month of October complete. Navratra has started on October 1, Diwali is on October 30. So, therefore October sales -- if you just look at October -- has to be higher than last October because last year the festive season was split between October and November. But, if I look at the total festive season starting from first of Navratra to end of Diwali I do expect that in all the industries that I am aware of one would see better volumes than last year. 10 percent better, 15 percent better or 20 percent better is hard to say but certainly we will see that.Q: Let me get you talking also about the broader headline or the big news item in India because of the Indo-Pak tensions. Diversified, globalised businesses like yours now is it becoming increasingly imperative for you all to take these geopolitical risks also into account when you are coming up with models?A: Today in business the whole sign of risk management is becoming more and more important. So, when you talk about risk management we make 12 month-budget plan. It used to be five years ago that we make a 12-month Budget plan and you will more or less hit it within 2-3 percent here and there. Today that is not so because there are too many external factors.