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Why June quarter capex numbers will be important

The jury is still out on the long-term damage to the economy because of the reimposition of lockdown restrictions and the health spending-inflicted shock of the pandemic. It is the long-term impact which matters as far as investment activity by private capital is concerned
UPDATED ON JUN 21, 2021 01:52 PM IST
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A section of economists has argued that there are limits to what easy money, which is what monetary policy offers through cheaper interest rates and higher liquidity, can achieve in an economy facing a demand-side problem. (REUTERS)

Monetary, not fiscal policy, has done most of the heavy lifting in dealing with the pandemic’s economic impact in India. A section of economists has argued that there are limits to what easy money, which is what monetary policy offers through cheaper interest rates and higher liquidity, can achieve in an economy facing a demand-side problem. Sure, there is also a flip side to lower interest rates as far as demand is concerned. Those who depend on interest incomes, such as the retired class, suffer a squeeze in incomes when interest rates go down. Interest rates on most small saving schemes have gone down during the pandemic.

Mridul K Saggar, a member of the Reserve Bank of India’s Monetary Policy Committee (MPC) has given a different perspective on this issue. In the minutes of the latest MPC meeting, which were published on June 18, Saggar argues that “not all savers may necessarily be worse off when central banks push down the interest rates”. Saggar has elaborated on why he thinks this is true. “As demand increases with monetary expansion, firms ramp up production. This improves their survival rate amid a deep shock like the pandemic. It also protects job losses and pushes more wages and salaries in the hands of households most of whom may get more than compensated for a drop in their interest incomes on saving.”

The latest corporate results of non-financial companies and credit data suggest that this logic is unlikely to hold. Capex numbers for the June quarter, which will be released next month, will offer further clarity on this.

Lower interest rates have not led to a spike in credit demand

Data on non-food credit is available until the month of April 2021. It shows that credit growth has not been able to reverse its deceleration despite a lowering of interest rates which has been happening from even before the pandemic struck. Repo rate, which was 6% in May 2019, was brought down six times before it reached 4% in May 2020, which is where it stands today, along with an accommodative monetary policy stance. Yet, growth in total outstanding stock of non-food credit continues to decelerate. A Centre for Monitoring Indian Economy (CMIE) Analysis of interim financial results of 1,705 listed companies offers some insights into why this could be happening.

Corporate profits have soared, but they are being used for deleveraging not investing

A CMIE analysis by Mahesh Vyas has looked at the March 2021 results of 1,705 companies out of the 4,400 listed companies that usually release their financial statements at the end of the quarter. “These companies raked in a net profit of Rs1.9 lakh crore”, which is “much higher than the record Rs.1.5 lakh crore net profit generated by the full set of companies in the preceding two quarters,” Vyas writes. To answer the question of what companies have done with their record profits, Vyas has looked at the balance sheet of 1,326 non-financial companies. The analysis shows that the debt-equity ratio (ratio of a company’s total liability and its shareholder equity) had fallen to 0.41, the lowest in 11 years for which data is available. The analysis also notes that “outstanding borrowings of listed non-finance companies declined by a substantial 9.3% as of March 2021 compared to March 2020”. “This is the first time that listed companies registered a fall in outstanding borrowings since September 2010,” Vyas adds. While companies are deleveraging aggressively, investment in building new productive capacity is happening at a tepid pace. “In spite of profits growing by a robust 48.5 % in 2020-21, companies grew their net fixed assets by a measly 3.7% at the year ended March 20201. The average year-on-year growth in net fixed assets since March 2017 has been close to 10%,” Vyas writes.

The only reason why firms will not invest even though profits are high, and cost of borrowing is low, can be that they do not feel the need to do so. This entails a lack of enthusiasm about current and future demand. It needs to be kept in the mind that the March quarter numbers were not affected by the second wave of Covid-19 infections and the sequential economic recovery seemed well on track then. If the demand outlook even before the second wave was sanguine, it could only have become worse in the current quarter.

June quarter capex numbers will be an important indicator of business sentiment

Consumer confidence, according to the latest Consumer Confidence Survey (CCS) conducted by RBI in May 2021, suffered a sharp fall. Net current perception on the general economic situation plummeted to an all-time low during the peak of the second Covid-19 wave, which is when the CCS was conducted. The situation is expected to have recovered with infections coming down. Private analysts such as CMIE suggest an improvement in both consumer sentiment and employment levels compared to May 2021 levels.

However, the jury is still out on the long-term damage to the economy because of the reimposition of lockdown restrictions and the health spending-inflicted shock of the pandemic. It is the long-term impact which matters as far as investment activity by private capital is concerned.

CMIE will release its investment statistics for the quarter ending June 2021 at the end of the month. CMIE’s capex database provides information by sector, on investment projects completed as well as new investment announcements. The latter is a good indicator of prevailing business sentiment. Both these variables fell sharply after the pandemic. While there was a sequential recovery in the quarters ending September 2020 and December 2020, value of investment projects completed fell again in the quarter ending March . New investment announcements, however, continued to increase, even though they were still low compared to past levels. A fall in new investment announcements for the private sector in the June 2021 quarter, if it were to happen, will be a grim indicator, as far as business sentiment is concerned.

Monetary, not fiscal policy, has done most of the heavy lifting in dealing with the pandemic’s economic impact in India. A section of economists has argued that there are limits to what easy money, which is what monetary policy offers through cheaper interest rates and higher liquidity, can achieve in an economy facing a demand-side problem. Sure, there is also a flip side to lower interest rates as far as demand is concerned. Those who depend on interest incomes, such as the retired class, suffer a squeeze in incomes when interest rates go down. Interest rates on most small saving schemes have gone down during the pandemic.

Mridul K Saggar, a member of the Reserve Bank of India’s Monetary Policy Committee (MPC) has given a different perspective on this issue. In the minutes of the latest MPC meeting, which were published on June 18, Saggar argues that “not all savers may necessarily be worse off when central banks push down the interest rates”. Saggar has elaborated on why he thinks this is true. “As demand increases with monetary expansion, firms ramp up production. This improves their survival rate amid a deep shock like the pandemic. It also protects job losses and pushes more wages and salaries in the hands of households most of whom may get more than compensated for a drop in their interest incomes on saving.”

The latest corporate results of non-financial companies and credit data suggest that this logic is unlikely to hold. Capex numbers for the June quarter, which will be released next month, will offer further clarity on this.

Lower interest rates have not led to a spike in credit demand

Data on non-food credit is available until the month of April 2021. It shows that credit growth has not been able to reverse its deceleration despite a lowering of interest rates which has been happening from even before the pandemic struck. Repo rate, which was 6% in May 2019, was brought down six times before it reached 4% in May 2020, which is where it stands today, along with an accommodative monetary policy stance. Yet, growth in total outstanding stock of non-food credit continues to decelerate. A Centre for Monitoring Indian Economy (CMIE) Analysis of interim financial results of 1,705 listed companies offers some insights into why this could be happening.

Corporate profits have soared, but they are being used for deleveraging not investing

A CMIE analysis by Mahesh Vyas has looked at the March 2021 results of 1,705 companies out of the 4,400 listed companies that usually release their financial statements at the end of the quarter. “These companies raked in a net profit of Rs1.9 lakh crore”, which is “much higher than the record Rs.1.5 lakh crore net profit generated by the full set of companies in the preceding two quarters,” Vyas writes. To answer the question of what companies have done with their record profits, Vyas has looked at the balance sheet of 1,326 non-financial companies. The analysis shows that the debt-equity ratio (ratio of a company’s total liability and its shareholder equity) had fallen to 0.41, the lowest in 11 years for which data is available. The analysis also notes that “outstanding borrowings of listed non-finance companies declined by a substantial 9.3% as of March 2021 compared to March 2020”. “This is the first time that listed companies registered a fall in outstanding borrowings since September 2010,” Vyas adds. While companies are deleveraging aggressively, investment in building new productive capacity is happening at a tepid pace. “In spite of profits growing by a robust 48.5 % in 2020-21, companies grew their net fixed assets by a measly 3.7% at the year ended March 20201. The average year-on-year growth in net fixed assets since March 2017 has been close to 10%,” Vyas writes.

The only reason why firms will not invest even though profits are high, and cost of borrowing is low, can be that they do not feel the need to do so. This entails a lack of enthusiasm about current and future demand. It needs to be kept in the mind that the March quarter numbers were not affected by the second wave of Covid-19 infections and the sequential economic recovery seemed well on track then. If the demand outlook even before the second wave was sanguine, it could only have become worse in the current quarter.

June quarter capex numbers will be an important indicator of business sentiment

Consumer confidence, according to the latest Consumer Confidence Survey (CCS) conducted by RBI in May 2021, suffered a sharp fall. Net current perception on the general economic situation plummeted to an all-time low during the peak of the second Covid-19 wave, which is when the CCS was conducted. The situation is expected to have recovered with infections coming down. Private analysts such as CMIE suggest an improvement in both consumer sentiment and employment levels compared to May 2021 levels.

However, the jury is still out on the long-term damage to the economy because of the reimposition of lockdown restrictions and the health spending-inflicted shock of the pandemic. It is the long-term impact which matters as far as investment activity by private capital is concerned.

CMIE will release its investment statistics for the quarter ending June 2021 at the end of the month. CMIE’s capex database provides information by sector, on investment projects completed as well as new investment announcements. The latter is a good indicator of prevailing business sentiment. Both these variables fell sharply after the pandemic. While there was a sequential recovery in the quarters ending September 2020 and December 2020, value of investment projects completed fell again in the quarter ending March . New investment announcements, however, continued to increase, even though they were still low compared to past levels. A fall in new investment announcements for the private sector in the June 2021 quarter, if it were to happen, will be a grim indicator, as far as business sentiment is concerned.

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