According to analysts, the Budget for 2023–24 could introduce a plan to make lower-rated corporate bonds marketable as well as efforts to reform labour regulations to allow businesses to establish new manufacturing facilities under production-linked incentive (PLI) schemes. Encouragements for states to implement urban governance changes may also cause a boom in the real estate market.
Analysts predict that while the Center will maintain its capex pace, private investment will be dependent on finding solutions to these problems as well as making industrial property more accessible.
“The government should establish a fund to provide low investment grade company bonds with first-loss insurance” (rated A and BBB). According to Ajit Pai, Strategy Lead Partner, Government and Public Sector, EY India, this will spur private investment in the economy.
Given that more economic development would result in fewer defaults, the costs of the system for the first three to five years wouldn’t be that significant, he claimed.
Therefore, the majority of corporations rely on bank loans, which were more affordable at 9–10%.
Lower investment grade corporates might be able to borrow at the same rates as AAA or AA-rated companies thanks to the government guarantee.
India lacks a robust corporate bond market, and major investors like insurers and pension funds are required to only invest in highly rated securities.
As a result, 95% of Indian bond issuances fall within the AAA and AA rating categories, compared to fewer than 5% in the US and less than 35% globally.
Companies switching to the corporate bond market will also make it easier for banks to lend to MSMEs, according to Pai.
The Rs 111 trillion National Infrastructure Pipeline, which has identified projects, including brownfield projects between FY21 and FY25, will also benefit from such a bond guarantee.
The private sector was anticipated to contribute 21%, with the Center (39%) and the States (40%) slated to have a nearly equal role in implementing the infrastructure pipeline.
In order to control inflation, the Reserve Bank of India has already raised the repo rate by 190 basis points in H1FY23 and 35 basis points in Q3FY23.
According to analysts, the cost of money is a significant barrier to utilising the Rs 1.97 trillion in incentives provided under PLIs for 14 sectors over the previous two years.
However, these have not taken off in most sectors except to some extent in mobiles, electronics and textiles. Yet, the government might announce more PLIs in the budget in areas such as speciality chemicals and electrolysers.
According to Bank of Baroda chief economist Madan Sabnavis, the government should extend a PLI scheme to small and medium enterprises as well even though it would work with a lag.
“The government can also consider SME parks which foster growth of SMEs in a cluster where there are tax breaks and provision of infrastructure which finally gets linked to exports,” Sabnavis said.
Among other suggestions, Sabnavis said the government should bring in an investment allowance which allows offsets from profit before tax (PBT) if invested in the next 365 days in capital assets.
One of the key impediments in firms going for Greenfield projects or expansion of brownfield projects is the labour laws.
Even though the government has subsumed 44 labour laws into four Codes to improve the ease of doing business and attract investment for spurring growth, these have not yet been notified.
The Labour Code on Industrial Relations will allow firms employing up to 300 people — against 100 now — to retrench/lay off workers and/or shut shop without government approval. Due to stringent labour laws, textile and apparel factories in India on average employ 40-60 people in a unit compared with 2,000 in Bangladesh and thereby losing the market space to the neighbouring country.
“PLI schemes are likely to help the country in achieving the goal of manufacturing, employment, investment and localisation. A single portal for PLI schemes with standard processes across various schemes is likely to help the industry and the government to monitor the effectiveness of these schemes,” Saurabh Agarwal, Tax Partner, EY India, said.
A majority of the companies had opted for a “wait and watch” approach during the first half (H1) of this fiscal on low capacity-utilisation and largely uncertain business environment.
The average capacity utilisation in manufacturing is over 70% and reflects a sustained economic activity in the sector, while the growth momentum is likely to sustain for another 6-9 months, according to a Ficci report.
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India Ratings chief economist DK Pant said demand stability is a pre-condition for investment revival. “While the PFCE has breached the pre-Covid level, sustained growth of it and exports growth will have larger bearing on investment demand,” Pant said.
The government’s goal to reduce the bloated budget deficit (from FY23BE of 6.4% to approximately 5.5-5.8% in FY24) would likely cause the increase in public sector capex that has been driven by the Center over the previous three years to continue, albeit at a slower growth pace.
A lower deficit would create space for the private sector to borrow more funds from the market.
The Modi Government is clearly in favour of decreasing the revenue expenditure while maintaining the requisite expenditure for subsidies and schemes for the poor, farmers, scheduled castes and tribes, Sandeep Vempati, Economist and Joint Convenor of Telangana BJP, said.
The capital expenditure increased from 12.31% of total expenditure in FY18 to 19% in FY23 while the revenue expenditure decreased from 87.69% to 81% for the above-referenced period, he said.
“The expenditure for Budget for 2023-24 could be Rs 45 trillion (up 7.3% over likely FY23RE of Rs 41.95 trillion) with revenue expenditure as Rs 35 trillion and capital expenditure as Rs 10 trillion (from Rs 7.5 trillion in FY23). The share of revenue and capital expenditure would be 77.78% to 22.22%,” Vempati said.
The federal government, state governments, CPSEs, and organisations like the NHAI and the railways all aggressively pushed for capital expenditures, which resulted in an increase in the gross fixed capital formation (investment) to GDP ratio from 33.4% to 34.6% in Q2 FY23. Since the government has been relying on public capital expenditures (Centre, states, and CPSEs) to drive economic growth in the absence of significant private capital expenditures, this increase has occurred over 50% in five years through FY23.
A senior official recommended that the Center speed up land monetisation by the defence, railways, salt commissioner, CPSEs and other central government agencies to free up lakhs of acres of land for public and private sector projects in addition to the ‘6 trillion brownfield asset monetisation under the National Monetisation Pipeline in four years through FY25.
Similar to this, the federal government should provide states additional incentives to implement reforms in the urban sector, like enabling larger FSI (Floor Space Index) restrictions to boost the real estate market.
source from: msn.com
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