Capacity Utilisation Still Has A Long Way To Go: C Narayanan

Chockalingam Narayanan, Head of Research, BNP Paribas Mutual Fund in a conversation with Himali Patel explains capacity utilisation across a large section of the corporate sector still has not reached the level. Excerpts from an interview

How will corporate rate tax cut impact mutual fund investors?

More than the headline change on taxes, what is really important to note is the fact that this move has come with an intention to pivot the economy towards a more investment led growth – a critical change for an economy which has historically been mainly driven by consumption. For any economy to sustain consumption growth the other segments also need to generate employment and hence we believe this is a very welcome step.

Further this is coming at a time of elevated global trade tensions; and in that sense could position the country – with a very large domestic market - to possibly start with import substitution and then progressively export from the country. Such a step is very critical from a job creation perspective as the industrial sector tends to have the highest multiplier. So, in the long-term perspective, this is an important move that could help kindle animal spirits and bring much needed investments and growth in the economy and thereby improve wealth creation opportunities for investors.

Do you think with this move, market sentiment has bottomed?

It is always difficult to call out behavioural changes – especially of the collective wisdom. We would not want to hazard a guess on the same. Having done the right structural changes from a social development perspective over the last few years, the Government has remained relatively steadfast on this agenda even when budgetary constraints have come up.

With that largely on the right course, the Government with this step has now moved towards setting the economic growth and the job creation agenda going ahead. This, if followed up with improved cash payments for the work done for the Government agencies, could help improve the working capital cycle and thereby the economic activity further. To some extent, this should ideally halt the feedback loop that was working against the sentiment in the economy.

Do you think this will provide a sizable fillip towards corporate India with potential to drive investments?

Capacity utilisation across a large section of the corporate sector still has not reached the level where the next leg of capacity creation could kick in. Following this development what could definitely start happening at the margin is the creation of facilities to substitute imports. We have seen that quite successfully for the first phase of domestic manufacturing of mobile handsets – which at least are now domestically assembled to the extent of nearly 90%. Over a period, this can move towards a higher level with players now also moving towards manufacturing printer circuit boards in the country. Similarly in ACs, we have now also started seeing domestic manufacturing of compressors.

In that sense, we could start seeing more and more products that can at the first stage see import substitution and then subsequently improve export competitiveness. This is also coming at a time when we have seen (a) some important labour law changes in a few states; (b) late stages of commissioning of critical trunk infrastructure in the form of Dedicated Freight Corridor; and (c) improving the GST compliance mechanism. Such changes should ideally position the country towards attracting incremental investments and consequently on consumption from improved job creation.