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It’s a question that’s top of the mind for the government and investors as well: When will the investment cycle start humming? Capital goods companies are saying there is no broad recovery in project investments. They are realigning their portfolio to meet demand from those sectors where investments are taking place, such as pharmaceuticals and renewables. Do read our take on the prospects for capital goods companies and also our research team’s investment view on Va Tech Wabag.
But the government wants Corporate India to splash out on projects so that it can take a break from spending on capital investments. The Prime Minister recently spoke to industry chief executives at a CII event and asked them to invest more. But as we point out in this article, the industry may have been more enthusiastic about making investments if the economic outlook had been better. Do see our Chart of the Day on the moderation in growth in most economies. While things were looking brighter for India after the first wave ended and economic activity resumed, growth forecasts for FY22 have been scaled down after the second wave. And, we don’t yet have our defences ready against the third wave.
We had pointed out in last week’s round-up that the RBI surveys showed that consumer sentiment was still very weak. While business sentiment was upbeat about the second quarter, they do not expect utilisation levels to increase. This is a double whammy. For investments to pay off, the goods they produce must be consumed and if consumers are in no mood to buy, then how will utilisation levels rise to the full mark? One bright spot is on the exports front, as developed economies are buying more.
Therefore, doing everything possible to drive consumption, whether it is stepping up the pace of vaccination or providing fiscal support to those hit hard by COVID-19 could help improve consumer confidence. But the government can take additional steps to spur investment. Making it easier to do business, giving policy certainty so that investors — domestic and foreign — feel confident of making investments can help. Take ethanol, for instance, where the government’s sustained and supportive measures for years are seeing investments being made to expand capacity.
Tax reform can make a huge difference as well. The government needs to revamp the GST framework and there are three pressing issues it needs to work upon. Do read our analysis to know more. Along with the various measures taken to plug leakage, if the government can improve the design — especially the rate structure and bring all goods under its ambit — then GST could become the big-bang reform it was meant to be.
Till the conditions are in place for companies to plunge into the capex cycle, the government will have to continue doing the heavy lifting.
More investing insights:
Weekly Tactical Pick | Control Print
Coal India: Stable earnings, higher dividend yield and undemanding valuation
Eicher Motors posts weak numbers, opportunity to accumulate
Lupin: Margin guidance downgrade keeps us cautious
Strong show by Bharat Forge amid challenges
Pidilite Industries: Margins to normalise in H2
Value innerwear players: Will these stocks continue to rerate?
What else are we reading today?
PM asks Indian industry to take risks, but government must also spend more Herd Immunity Tracker: Long period of vulnerability unless vaccination is ramped up
The BSE mid-cap fiasco illustrates why authorities should leave free markets alone
Chart of the Day | Month-on-month retail inflation edged higher in July
Will a secondary market for corporate loans boost bank credit growth?
What a $600m heist tells us about the future of crypto (republished from the FT)
Technical picks: Apollo Hospitals, Tata Motors, Coforge and IOB (These are published every trading day before markets open)
Ravi Ananthanarayanan
Moneycontrol Pro
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