India: Growth fillip via infrastructure and business reforms promising

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1 India Economic Snapshot Treasury Research Group October 30, 2006 For private circulation For only private circulation only India: Growth fillip via infrastructure and business reforms promising The end of November will give us a glimpse of India s growth performance in Q2 FY2018. As high-frequency indicators imply, this has generally been a quarter that has seen a growth uptick on various fronts. Below we present a snapshot of some of these sectoral economic indicators. Additionally, given the Government s recent push to infrastructure, we examine the impact this will have on the economy via multiplier effects. November 14, 2017 Sumedha Dasgupta sumedha.dasgupta@ icicibank.com Please see important disclaimer at the end of this report Lead indicators for services sector: Growth in domestic automobile sales has remained supported over the July-September quarter by robust festive demand as well as some restocking at the dealer level after the initial Goods and Services Tax (GST)-related disruption. A near-normal monsoon, lower borrowing costs, and softer inflation aided consumption growth. On the other hand, frequent changes in policy, high tax rates on some vehicle categories and road tax not being subsumed under GST may be the key headwinds for the sector. o Passenger vehicle sales rose riding on good growth in utility vehicles segment. Growth in April-October 2017 has averaged ~7.4% YoY. o The healthy 12% YoY growth in the two-wheeler segment in Q2 FY2018 was aided by motorcycle sales. o The festive season buying, coupled with the need to modernize truck fleets, contributed to an uptick in the sale of large commercial vehicles in Q2 FY2018. o Following this robust performance in April-September, growth in all three segments has come off in October, on the back of a major slowdown in passenger car, M&HCV and motorcycle sales. This could be attributed to a higher base as most of the festivals were spread across September and October last year, while this year festival season sales started in the last week of September and tapered off by mid-october. (% YoY) Passenger Vehicles Commercial Vehicles Two Wheelers Apr May Jun Jul Aug Sep Oct Banking system indicators: Amid the recent push for bank recapitalisation, it is worthwhile to take a look at the recent patterns of credit devolution in the economy. Overall credit growth to the industrial sector has shown steady improvement, albeit still declining on an annual basis. o Credit growth to the micro small & enterprises (MSME) sector has tempered its slowdown. This is a positive, given that this sector has been adversely affected by compliance related costs of GST which disrupted supply chains, as this sector has a high proportion of informality in operations. o In a welcome development, credit allocated to infrastructure has picked up from -9% YoY in January to -1% YoY in September. If issues related to land acquisition and environmental clearances get swifter clearance, this sector will get a fillip, aiding in credit creation. Credit to MSME credit Credit to Credit to Credit to Personal (% YoY) Industry grow th Construction Infrastructure Services loans Apr May Jun Jul Aug Sep Sources for heat-maps: CEIC, ICICI Bank Research

2 In light of the Government s recent push to infrastructure via the Bharatmala Pariyojana (BMP), it is worthwhile to note the impact this venture will have on the rest of the economy via multiplier effects. Multiplier Effect: Enhanced public expenditure on infrastructure has substantial multiplier effects for the rest of the economy, which would lead to augmented demand and job creation, benefitting growth. According to RBI, the impact multiplier of capital outlay is quite high at ~1.29, with peak impact of ~3.56 over the. The multiplier effect of revenue expenditure at 0.37 is seen only in the short-run. It perhaps implies a rapid crowding out of private demand component. In contrast, the impact multiplier of capital outlay is much higher than the revenue expenditure at 1.29, with a peak of around 3.56 in the fourth year after the shock. However, the size of multiplier for non-defence capital outlay is still higher at 1.81 than the overall capital outlay and the effect prolongs up to three years. The larger size of multiplier for capital outlay confirms that public expenditure allocated for investment has a larger growth inducing impact than that used for consumption. Interestingly, the size of combined development expenditure multiplier is smaller than that of capital outlay as it mainly comprises revenue expenditure (around 79%). It is found that size of expenditure multiplier at Central and States level varies significantly. Lower expenditure multiplier at the Central level perhaps confirms the argument made in the literature that local government spending generates higher expenditure multiplier as investment projects are of relatively smaller scale, and are managed locally and, therefore, have lower gestation lags than projects of higher level of government. In the case of India, 1% increase in total spending by the Central government leads to 0.04% increase in GDP leading to a multiplier of 0.4. In contrast, 1% increase in aggregate expenditure by the State governments has an incremental impact of 0.11%, thereby leading to a multiplier of In conclusion, the boost to capital outlay on infrastructure is poised to provide a fillip to several other sectors of the economy, and over time crowd in private investment Impact Of Infrastructure Improvements On Various Industries In India Sector Impact Nature of Impact Rationale Cement Very high immediate Growth comes from direct input in infrastructure Steel Very high Absorb excess capacity and generate growth immediate from direct input in infrastructure Automobilescommercial vehicles Real estate Capital goods Automobilespassenger vehicles High Source: S&P Global, ICICI Bank Research short Indirect-- Indirect-- Generates growth from direct use in construction and transportation activities Helps generate demand for unsold inventories, improves connectivity, and supports land prices Results in new capital orders (but with a lag), if manufacturing demand picks up due to infrastructure improvements Decongestion of roads to support car demand, infrastructure development will still be inadequate to replace private transport 2

3 Ease of Doing Business in India: In the context of the infrastructure push, it is also pertinent to delve into India s performance in s of Ease of Doing Business. India has improved its ranking by 30 notches in the World Bank s Ease of Doing Business rankings for 2018, ranking at 100, as compared to 130 last year. The primary indicators for which Indian economy has exhibited substantial improvement according to the World Bank include Starting a business, Dealing with construction permits, Resolving insolvency, Paying taxes and Getting credit The important reforms implemented by the Government in these categories are as below: In dicator Starting a Business Reforms en acted 1) Merging the applications for the Permanent Account Number (PAN) and the Tax Account Number (TAN), 2) Improving the online application system Dealing with Construction Permits Resolving Insolvency Payin g Taxes Getting Credit Source: World Bank, ICICI Bank Research 1) Implementing an online system that has streamlined the process at municipalities. This has streamlined the process of obtaining a building permit. 1) Adopting a new insolvency and bankruptcy code that introduced a reorganization procedure for corporate debtors and facilitated continuation of the debtor s business during insolvency proceedings 1) Making payment of EPF mandatory electronically 2) Introducing a set of administrative measures easing compliance with corporate income tax 1) Amending the rules on priority of secured creditors outside reorganization proceedings 2) Adopting a new law on insolvency that provides a time limit and clear grounds for relief to the automatic stay for secured creditors during reorganization proceedings It is worth noting that the Goods and Services Tax (GST) reform does not feature in the World Bank s list of enacted reforms in India, reflecting that this factor was probably not under consideration when the ranking for India was decided this year. Given that GST is now implemented in India, this should mean that India s rank in s of Ease of Doing Business should improve significantly next year, when this watershed tax reform would be considered by the World Bank under the aegis of Paying Taxes. While the improvement in rank this year is a welcome development, a further improvement in the future would bolster confidence in the Indian economy. 3

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