Indian companies are expecting generous tax incentives from the Union Budget that will help them invest more in building capacities in the coming years.
While the productivity-linked incentives (PLIs) are a good start to spur local manufacturing, the government should also take steps to boost consumer demand, which is not showing encouraging signs, say chief executive officers (CEOs) of India Inc.
Statistics released by the Reserve Bank of India (RBI) shows that Indian banks had sanctioned loans worth Rs 75,558 crore in 220 new projects — a record low — in the pandemic-hit financial year ending March 2021.
This is not showing any signs of a significant pick up in the last nine months of the ongoing financial year.
Data released by the RBI shows that in financial year ending March 2020, banks had sanctioned loans worth Rs 2 trillion for 320 projects while in the previous year, sanctioned loans for 409 projects were Rs 1.75 trillion.
A sharp fall in demand across consumers is cited as the main reason for companies to hold back on fresh investments.
“The government should focus on low cost of capital for infrastructure projects and reduce corporate and personal taxes to boost domestic spending,” said the CEO of a power generation company.
Due to the second wave of the pandemic, several restrictions were imposed in many regions of the country.
This adversely affected capacity utilisation in the Indian manufacturing sector.
The impact was, however, less severe than that witnessed during the first quarter of financial year 2020-21 in the wake of lockdowns and other restrictions during the first wave.
At the aggregate level, capacity utilisation for the manufacturing sector declined to 60 per cent in Q1 of financial year 2021-22 from 69.4 per cent in the previous quarter, according to the RBI.
Unless capacity utilisation crosses 75-80 per cent, Indian companies may not invest in adding capacities.
Companies prefer to prepay loans and other liabilities instead of announcing new projects.
In the last one year, apart from top groups like Reliance, Adani and Tata, which announced plans to invest in semiconductor plants, not many have come forward to announce capacity additions.
CEOs say the government must boost demand from consumers — especially in rural India, which is not picking up.
“The government must make sure that money flows to the bottom of the pyramid and create opportunities for daily wage earners,” said the CEO of a Kolkata-based group.
The capex focus in FY22 will be specifically on roads, railways, housing, and rural/urban infrastructure.
The government may also offer incentives to states to increase capex.
This is because states’ revenue capacity could be hit with the possible expiry of the GST (goods and services tax) compensation clause.
Niranjan Hiranandani, managing director of Hiran¬andani group, a real estate firm, said the Budget should announce a significant step-up policy to prevent any further downturn.
“Incremental measures aimed at providing fresh lease to the beleaguered sectors will be a crucial denominator for overall economic growth.”