MUMBAI: Leading economists have warned that the uncertainties arising from the trade war with the US—effective today Indian goods worth $45 billion reaching the American shores will attract a whopping 50 per cent tariffs—will force India Inc which have been holding back investments since the boom and bust years of the 10 year Manmohan Singh regime (2004-14) to delay their capex plans yet again.
Monday, CS Setty, the chairman of the naiton's largest lender said, India Inc is sitting over a whopping Rs 13.5 trillion of cash pile now, essentially because of not investing in new plants or capacity addition and because of the deleveraged balance-sheets.
While the first term of the Manmohn Singh regime from May 2004 to May 2009 saw a massive investment boom by corporates to add capacity on the back of a robust domestic demand after the global financial crisis that began in September 2007 but spilled over to the domestic shores only around 2009, the companies became investment averse and also the ripple effect had left them bleeding which saw bad loans in the system touching mid-double digits.
In fact all the 11 Modi years could not revive their investment cycle and all that capex that was being spent was by the government directly or through the public sector entities.
Another major reason is that consumer demand has also not recovered from the 2004-09 boom and capacity utilization is still under 75 per cent.
In a report on Wednesday, Crisil Ratings said the imposition of punitive tariffs is likely to hit investment sentiments, even as healthy corporate balance sheets support fresh investments and that for the past several years, it has been the government capex that has been driving investments, with private corporate capital expenditure remaining muted.
Considering a trade war as the most effective tool of diplomacy, the Trump administration has been on an import tariff hiking spree from August 7—after many a delays and postponements.
The so-called reciprocal tariffs were originally scheduled to come in effect from April 1, which was changed to April 9 with a 90-day implementation gap for negotiations and again changed to August 7. Since New Delhi could not complete talks on better days, a 25 per cent flat reciprocal duties were imposed on all Indian goods, with applicable exceptions, reaching the American shores from August 7 and an additional punitive 25 per cent duties on these applicable goods from today for not stopping imports of Russian oil.
Icra Ratings chief economist Aditi Nayar also concurred with Crisil view and told TNIE from New Delhi that the lingering global uncertainty, especially those arising from the trade war that the US has unleashed on India, is likely to cause the domestic private capex cycle to get further delayed.
"However, certain sectors such as electronics, semi-conductors and segments like electric vehicles will continue to see a scale-up in investments," Nayar said.
Similarly, Devendra Kumar Pant, the chief economist at India Ratings, also felt that the lingering trade war woes will hold back corporates from deploying their funds.
"Uncertainty always delays investment decisions. Weaker consumption outlook has an impact on corporate capex, which is further impacted by the tariff uncertainty. This is likely to delay general capex revival in the economy. However, it would continue to take place in sectors such as power, roads etc," Pant told TNIE from New Delhi.
In the current uncertain environment, free trade agreements (FTAs) can enhance investor confidence by reducing tariff barriers and establishing predictable trade policies, Crisil said.
As of August 24, US tariffs on India stand higher than those on China, Bangladesh, Vietnam, and Indonesia.
According to Crisil, the new challenges, which are holding back the animal spirits of the corporate India despite supportive macroeconomic parameters, are disruptions in the global supply-chains due to the rising geopolitical tension and the lingering domestic inefficiencies like high power and land costs, the report said.
According to the report, opportunities stem from new trade agreements, like the FTA with England, and the ability of the corporate houses to invest.
