4QFY13 results of L&T and guidance for FY14 substantiate
our view that domestic investment cycle in India is seriously broken and may
take more than marginal rate cuts to get back on track; natural corollary to
this is that the path to 8% growth trajectory is not only long but also
tedious.
Years of fiscal profligacy and misdirected monetary policy
are to blame to a large extent, though poor governance and non-compliance by
corporates and other tax payers cannot escape the blame.
In a recent
article Nobel Laureate Michael Spence highlighted that “Accumulating
excessive debt usually entails moving some part of domestic aggregate demand
forward in time, so the exit from that debt must include more savings and
diminished demand. The negative shock adversely impacts the non-tradable
sector, which is large (roughly two-thirds of an advanced economy) and wholly
dependent on domestic demand. As a result, growth and employment rates fall
during the deleveraging period.
In an open economy,
deleveraging does not necessarily impair the tradable sector so thoroughly.
But, even in such an economy, years of debt-fueled domestic demand may produce
a loss of competitiveness and structural distortions. And the crises that often
divide the leveraging and deleveraging phases cause additional balance-sheet
damage and prolong the healing process.”
Applying this to Indian context, first the rush to
accumulate cheap credit and then fiscal misadventure in the name of stimulating
the economy post Lehman crisis did lead to excessive debt both at government as
well as corporate level in past 7years. This did bring unmanageable demand
forward in time.
For example, over 50GW power projects were initiated and
fertilizer policy was made when the feed stock supply chain to fuel the power
and fertilizer plants was far from ready. The capacity to pay unaffordable toll
was not there when over 5000km of toll roads were commissioned. Regulatory
framework for sustainability was not ready when mining rights were awarded for
numerous coal, iron ore and bauxite mines.
Many of these power plants are lying idle and so are
numerous industrial projects conceived based on supply assumptions from these
plants. Many toll roads have become unviable or are lying uncompleted. Most
coal and other mines are yet to start commercial production and KG basin is
producing only 1/5th the assumed gas production.
Despite whatever government economists may say, the correction
is going to be painful and lengthy. The deleveraging of corporate balance
sheets will happen in three stages – asset sales, debt waiver and capital write
off. The “restructured debt” plan of RBI is an artificial barrier to early and
efficient completion of the process.
The government deleveraging should ideally happen in two
stages – higher taxes and lower subsidies.
Does not sounds good for capex and credit. Shampoo,
detergent, noodles, motor cycles are fine for now.
No comments:
Post a Comment