A cycle rickshaw driver and passenger pass by the construction site of a residential building in Nagpur, India, on Sunday, June 30, 2013. India’s services growth slowed in June with the purchasing managers’ index falling to 51.7 from 53.6 in May. Photographer: Dhiraj Singh/Bloomberg  

Economy Is Showing No Momentum, Says CMIE’s Mahesh Vyas

The Indian economy is not doing well as capital expenditure and investments are not picking up, said Mahesh Vyas, managing director and chief executive officer at the Centre for Monitoring Indian Economy Pvt. Ltd.

“The government is not enthusiastic in increasing its fiscal deficit and not willing to spend more,” Vyas told BloombergQuint in an interview. “We are in a limbo where there are no stimuli either from the RBI or government, and the private sector is waiting for the demand to pick up.”

Watch the full conversation here:

Also read: CMIE Data Suggests No Pick-Up In Private Investments

Here are the edited excerpts from the conversation:

The new project data seems to be very disappointing mainly on account of a pullback from the government. Can you take us through detailed numbers and your interpretation?

In a way they are disappointing, and in a way, they are expected. They are disappointing because they are low, and much lower than they have been in the past. If you remove the two large projects which are to purchase aircraft, then the new proposals for investments drop to a very small number, less than Rs 700 billion only. That is very disappointing.

It is doubtful that new investment proposals will pick up. The only thing we can hope and be happy about is that the number doesn’t fall too much. The government and the private sector both have withdrawn. If you see an increase in the private sector, it is only because Jet Airways is buying aircraft, which is different from a usual plant and machinery or an infrastructure project coming up.

So, there is a significant demand for airline services. Most airlines do go full. Thus, they are increasing the capacity. The airlines and the automobile companies are doing well. But the economy as a whole is not doing very well as investments aren’t coming up over there. So, there is a disappointment, but at the same time, it is not difficult to understand where these numbers are coming from.

What explains the dramatic drop in government-led new projects? Is that something you have been anticipating?

In the recent past, the government and the private sector seem to be moving in tandem. When investments go down, both go down. When investment rise a bit, both rise, which means that the government and the private sector are reacting to the market situation.

For example, if the government is the major investor in the power sector, then you see the plant load factor of the thermal power plant is close to 60-65 percent, which is very low. One wouldn’t expect the government or the private sector to invest more in the power sector. Capacity, in general, is 70-74 percent, which is also very low, and it cannot enthuse the government and the private sector to go and invest.

We are disappointed that government investment in the road sector has declined this quarter. The road sector has seen a drop which was not called for.

So, no new road projects have been awarded or started. Is that how one would interpret it?

There is a definite increase in completion of projects. The numbers given out by the government shows that 22 km of roads are laid every day compared to 16 km before that and even lesser than the 12 km earlier. There is a commendable ramp up on the implementation of road projects.

However, last year we have seen a sharp drop in awarding new projects, which was 8,000 km in 2017-18 compared to 15,000 km the year before. So, new road awards have come down, which is surprising. In the quarter ended June 2018, we saw a drop in the number of new road projects being announced. We are surprised by this apparent scaling back by the government as we do require more roads.

In the monetary policy statement, there was a suggestion by the RBI when explaining the increase in rates that they have seen a bump up in capacity utilisation. Are you seeing that happening at all?

In the RBI survey to measure capacity utilisation, the last number they have given was in December 2017, which stood at 74 percent, slightly higher than 70 percent earlier. They should have released the recent numbers.

However, 70-74 percent is nowhere close to the capacity that the industry will feel enthused about to put up new capacities. There is still too much slack. We have seen 70-74 percent [capacity utilisation] several times in the past, and we haven’t seen an increase in investments following that. We require capacity utilisation to go up beyond 80 percent before we see new capacities being built aggressively.

When it comes to stalled projects, there has been a slight improvement. What colour can you add so that we get a better understanding of how to interpret this data?

When you see low capacity utilisation and when you get into a pre-election year, and there are assembly elections in states which are resource-rich, investment in resource-intensive projects will naturally slow down because in the last two months the uncertainty regarding the outcome of the 2019 elections has increased.

So, in these uncertain times, companies/government would rather wait and see what the verdict is before they make any aggressive announcements for new investments. This is a new thing which has happened. However, in general, if you have a have large capacity which is unutilised, then you will delay the new investment announcements and also the implementation of existing capacities. Till domestic demand does not pick up, we are going to see a slowdown. There is some stress over banks, industries and companies which will not be able to raise resources. However, I think the main problem is not the banking sector and not the balance sheet of the companies. It’s that demand needs to pick up. For that, we have to wait to see for another year before numbers pick up.

It is tough to make out where we stand today. Anecdotally, industrialist, businessmen say that they are looking at some brownfield expansion, if not large greenfield projects. What’s your sense of where we are today?

The numbers we see show that jobs are not growing, investments are not growing, the RBI numbers say that capacity utilisation is low. Low inflation is also an indication that demand is not very robust. So, the answer is clear that the economy is in a slack and requires to be bumped up.

The government is not enthusiastic in increasing its fiscal deficit and not willing to spend more. So, we are in a limbo where there are no stimuli either from the RBI or the government, and the private sector is waiting for demand to pick up. So, we are in a limbo where the economy is not accelerating.

I will disagree with the RBI’s analysis that there is a pick-up in growth. If you say 7.5 percent is where we are looking at in the last quarter, and that’s where we are going by, then I think, they are stretching it. Because the number, whether on jobs or investment don’t show that the economy is picking up.

Do you think that a good monsoon and enhanced rural demand, increase in minimum support prices that were announced yesterday, any of them would help elevate this to some extent?

I am quite hopeful on the MSP announcement yesterday which should make a difference. It is not that I agree with policies of MSPs in general. However, taking an extremely short-term view, sowing was very poor in the first month of the kharif season. Sowing was 20 percent low compared to the year-ago period, which is bad. Rains are not so bad to cause a 20 percent drop in sowing on a yearly basis. The bigger factor which holds back kharif sowings is low agricultural product prices.

For pulses in general, market prices are lesser than they were 1-2 years ago. So, with these low prices, farmers are not very enthused to sow pulses aggressively. The story on cereals was no better. Bajra, in particular, was quite low. Since it is a late sowing crop and maybe it will pick up. It is nice to see that in a sense the MSPs were extremely aggressive for bajra and pulses too.

Hopefully, that will lead to some increase in sowing. The prices need to hold. The government hasn’t been very clear in its announcements of how this MSP will go up in the hands of farmers. They say they will talk to central and state government agencies and work this out. There is little uncertainty over there. Not being sceptical, but there is some hope because of MSP.

Do you think this will boost the rural economy enough to help meaningfully change your perception of absolutely no momentum or acceleration in the economy?

No, this is not enough. This will help, but this is not enough. This will not change the mood entirely. MSP is not a game changer. It is far away from there. It is a positive step from a short-term perspective.