Union Budget fails to provide a push to investments

Modest increase in capital expenditure; no incentive to private players

by Mahesh Vyas

The central government’s capital expenditure is budgeted to increase from Rs.2.8 trillion in 2016-17 to Rs.3.1 trillion in 2017-18. This implies a 10.7 per cent increase, which is about the same as the revised increase expected in 2016-17. But, it is much lower than the 28.7 per cent increase recorded in 2015-16.

Recent trends in capital expenditure show much volatility in the year-on-year growth, ranging from over 28 per cent to under five per cent in a year. Nevertheless, the average works out to about 12 per cent increase in capital expenses of the central government per year since 2012-13.

This average 12 per cent per annum growth has been insufficient to raise the investment ratio (GFCF-to-GDP) or even arrest its continuous fall since 2012-13. The ratio has fallen from 33.4 per cent in 2012-13 to 26.6 per cent in 2016-17. It follows that the 10.7 per cent growth in capital expenses budgeted for 2017-18 would not lift the investment ratio or even arrest its continuing fall. It makes it a little worse when we take into account the fact that the increase in capital spending in 2017-18 is not strictly comparable to the expenses in 2016-17 as some expenses that were considered revenue are now considered capital.

The government can promote investments by nudging cash-rich public sector enterprises to increase their outlays. But, according to the budget papers, investments by central government public enterprises are budgeted to decline to Rs.5 trillion from Rs.5.2 trillion in 2016-17 as per the revised estimates.

Central PSEs did bump up investments in 2016-17 by a handsome 25.9 per cent. It was budgeted to rise 22 per cent and may actually rise by a higher amount. Earlier, in 2015-16, PSE investments had risen sharply by 39 per cent. However, it appears that there would be no further growth in investments by PSEs in 2017-18.

The finance minister did dwell upon listing of PSEs and also about mergers and consolidation of PSEs in his budget speech but, there wasn’t any indication of spurring investments through them.

So, a less-than-average growth in capital spending by the government itself combined with no growth in public sector enterprises indicates the government’s unwillingness or inability to finance a recovery in investments in the country.

Does the budget then provide an incentive to the private sector to invest? There is no direct tax incentive for building new capacity. The lower corporate tax rate applicable to companies with a turnover of Rs.500 million does provide an incentive to companies to increase their profits and this should help some of them grow.

One problem with this threshold (such as Rs.500 million) is that it can become a reason for companies to not grow beyond the limit or may even incentivise companies close to the threshold to split into multiple companies to avail benefit of the lower tax rate. But, the budget has addressed the issue by allowing all companies that had a turnover of or less than Rs.500 million in 2015-16 to avail of the lower tax rate in and after they grow beyond the threshold.

This should provide an incentive for companies to grow their business. At a macro-level, however, this is unlikely to make a difference to the large problems of the low investments ratio. This is because the larger problem of lacklustre demand will continue to hold investments.

Public sector banks have been provided Rs.100 billion for recapitalisation in line with the Indradhanush roadmap. While this will help public sector banks overcome some of their capital adequacy problems, it is not sufficient to spur credit growth and investments as the demand itself remains low.

In the face of low consumer demand, spurring private investments is difficult and so the only way the budget could spur investments could be through direct investments or through PSEs investing. The Finance Minister has opted for neither. As a result, the investment scenario is likely to remain staid in 2017-18, at least.

CMIE STATISTICS
Unemployment Rate
Per cent
3.8 +0.1
Consumer Sentiments Index
Base September-December 2015
99.7 +0.2
Consumer Expectations Index
Base September-December 2015
100.0 0.0
Current Economic Conditions Index
Base September-December 2015
99.1 +0.5
Quarterly CapeEx Aggregates
(Rs.trillion) Jun 16 Sep 16 Dec 16 Mar 17
New projects 1.45 2.40 1.40 2.87
Completed projects 0.90 2.20 0.88 1.65
Stalled projects 1.40 0.64 1.01 0.32
Revived projects 0.40 0.51 0.17 0.62
Implementation stalled projects 0.50 0.37 0.80 0.27
Updated on: 23 May 2017 8:20PM
Quarterly Financials of Listed Companies
(% change) Jun 16 Sep 16 Dec 16 Mar 17
All listed Companies
 Income -0.9 2.1 6.3 10.3
 Expenses -0.3 1.9 6.6 9.5
 Net profit -4.0 14.6 37.8 37.5
 PAT margin (%) 6.9 6.9 6.1 7.3
 Count of Cos. 4,499 4,479 4,449 1,114
Non-financial Companies
 Income -2.5 0.6 6.1 12.7
 Expenses -2.9 -0.2 7.6 17.3
 Net profit 9.7 26.7 22.2 -7.0
 PAT margin (%) 7.4 6.9 6.2 10.0
 Net fixed assets -9.2 8.0
 Current assets 8.1 5.1
 Current liabilities 11.6 7.7
 Borrowings 3.1 7.1
 Reserves & surplus 8.4 12.7
 Count of Cos. 3,502 3,485 3,468 884
Numbers are net of P&E
Updated on: 23 May 2017 8:29PM
Annual Financials of All Companies
(% change) FY13 FY14 FY15 FY16
All Companies
 Income 12.4 9.9 4.9 1.0
 Expenses 12.6 9.7 5.0 1.1
 Net profit 1.2 -3.1 2.1 -12.4
 PAT margin (%) 3.6 3.2 3.2 3.1
 Assets 14.3 12.2 9.3 8.1
 Net worth 9.5 9.6 8.6 7.4
 RONW (%) 6.8 6.1 6.1 5.5
 Count of Cos. 24,399 21,813 20,887 16,947
Non-financial Companies
 Income 11.7 9.6 4.0 0.0
 Expenses 12.0 9.2 4.1 -0.8
 Net profit -8.4 -3.8 -4.0 12.5
 PAT margin (%) 2.4 2.2 2.2 2.8
 Net fixed assets 12.9 11.6 13.0 12.4
 Net worth 7.7 8.6 7.2 6.7
 RONW (%) 5.5 5.0 4.9 5.8
 Debt / Equity (times) 1.1 1.1 1.1 1.0
 Interest cover (times) 2.1 1.9 1.9 2.1
 Net working capital cycle (days) 72 69 67 66
 Count of Cos. 18,910 17,264 16,595 13,776
Numbers are net of P&E
Updated on: 21 May 2017 10:44AM