Indian elections, especially at the national level, bring a level of upheaval not seen by any other event in the country. This, of course, extends to the economy as well. While it is well-established that the election and Model Code of Conduct bring a slowdown in government capital expenditure and new announcements, what’s notable about this Lok Sabha poll is that it has come at a particularly bad time for the private sector.
That is, several signs heavily imply that the private sector is raising its hammer to strike the anvil of investment, but the uncertainty brought on by the election is forcing it to wait. This wait will most likely extend all the way till mid-July, following the presentation of the full Budget for the year by the new government.
This delay is nobody’s fault — since elections are essential and the timing is largely set — but it is certainly coming at the wrong time. Although India is shining bright as one of the sole beacons in the global economy, this is not hard to do in a difficult global environment. The private sector ramping up its spending would have been a welcome boost to growth at a time when it is currently being carried single-handedly by government spending.
Ready to strike
Several signs are in place showing that the Indian private sector is ready to invest and is likely even willing.
The most striking sign in the recent past has been the growth of credit to large industrial companies. As ThePrint reported earlier this month, bank credit to these large companies rose to above pre-pandemic levels in 2023-24. The growth rate in this credit disbursement, too, was the fastest it has been since 2018-19.
In addition to this, companies have increasingly been raising money from the bond market, with private sector bond issuances touching Rs 8.4 lakh crore in 2023-24, the highest in at least six years, and a pretty healthy 12 per cent higher than the previous year.
Now, large companies in India spent the post-pandemic period reducing their debt levels and cleaning up their balance sheets. If they are once again borrowing from banks and the bonds market, and increasing amounts, then this is a clear sign that they are getting ready to invest.
The other indication that the time is ripe for private sector investment is that capacity utilisation — a measure of how intensively existing assets are being used to produce output — is reaching the point where companies start looking to expand capacity.
Data with the Reserve Bank of India (RBI) shows that capacity utilisation has been hovering around the 75 per cent mark for several quarters now. This mark is considered by most investment analysts as the threshold at which companies decide that new capacity is needed to keep up with demand.
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The other half of the story
Now, here’s the other key part. Post-pandemic demand has been notably uneven. While sports utility vehicles (SUVs) and luxury cars have been witnessing robust growth, smaller cars have seen sales remain more muted. Higher-end mobile phones are selling strongly, while budget phones are growing in single digits. In real estate as well, the surge in sales is being driven by luxury houses.
Yet, some signs are emerging that rural demand is starting to pick up. A NielsenIQ report from earlier this month found that rural sales for the fast-moving consumer goods (FMCG) sector in January-March 2024 outpaced urban sales for the first time in five quarters.
Given that the Indian Meteorological Department (IMD) expects a normal monsoon this year, the pickup in rural demand should quicken over the next several months. Add to this the fact that private companies — especially the ones in the high-investment sectors like cement, steel, and mining — have significant order backlogs and fresh orders, mostly thanks to the Centre’s infrastructure push.
But this is where the election uncertainty is playing a spoilsport. The broad unofficial consensus outside of social media seems to be that the Narendra Modi government will return for a third term, though with a smaller majority, and maybe even only with the help of alliance partners.
Yet, the level of uncertainty brought on by the campaigns of the Congress and its allies is just enough to make most people hesitate before putting money behind their bets. Companies, too, are waiting. They won’t officially say it, but this wait-and-watch strategy is clear in conversations with industry bodies.
No consensus between the two
The problem is also that there’s very little consensus between India’s two biggest political parties on key policy aspects that affect investment sentiment. For example, the Congress has talked extensively about bringing in a Goods and Services Tax 2.0 with fewer (and likely higher) rates. The Bharatiya Janata Party (BJP) seems content with the current setup. GST is a core ease of doing business aspect. Constant fiddling only adds to the uncertainty.
The BJP also seems fine with the corporate tax rate cuts it implemented in 2019, but this has been something the Congress has been lambasting ever since then. There’s also no agreement between the two parties on how to generate employment in the economy. Should manufacturing or services be the source?
It’s to be expected that the Congress would come up with radical ideas to attract voters tired of the status quo. But considerable uncertainty also seems to be coming from PM Modi’s own assertions that he will hit the ground running in his third term with big bang reforms.
The wait will also likely be a long one. The election has been scheduled to run for a whopping six weeks from start to finish. Add to that the formation of the new government, and the presentation of the Budget, and it’s only in mid-July that companies will have any clarity on the economic direction the country will take.
The policy prescriptions from this election-related pause in investments are limited. But at the outset, the Election Commission of India (ECI) certainly needs to look at shortening the length of the election process in India.
This is also perhaps the first time in about 30 years when there are strong fears that the overall political consensus on key economic policy aspects seems to be fracturing.
The Indian government also needs to inculcate a sense of policy certainty regardless of the party in power. That is, companies should not feel so uncertain about how key aspects of the economy are going to progress under any new government. Perhaps it’s time to think about a list of ‘reserved’ policies that won’t be changed for a certain number of years, regardless of a change in government.
TCA Sharad Raghavan is Deputy Editor – Economy at ThePrint. He tweets @SharadRaghavan. Views are personal.
(Edited by Humra Laeeq)