Real estate and export reforms unlikely to revive demand in near-term: Ind-Ra

The recent set of measures to stimulate growth announced last week will yield only limited short-term benefits, India Ratings and Research (Ind-Ra) said on Tuesday.

The weakness in the economy has largely been caused by demand-side headwinds, which have been exacerbated by structural bottlenecks. However, the gamut of measures announced — especially those pertaining to the real estate sector and exports — mainly focus on facilitating supply-side activity in these sectors.

Nonetheless, these reforms are likely to stimulate investments in export-oriented sectors over the long term, said Ind-Ra.

In any economy, consumption demand can be bifurcated into the household and non-household consumption which are interlinked. Household consumption is a function of the income distribution (by way of salaries, wages and other expenditure) by the non-household segment. Robust household demand, on the other hand, necessitates further capital expenditure by the non-household segment.

“These reforms thus would have been more encouraging in an environment of adequate household demand,” said Ind-Ra adding that in order to rejuvenate economic activity, any reforms must necessarily give a direct boost to household demand.

The speedy pay-out of input tax credit, inter-state goods and services tax (IGST) refund could materially ease the liquidity pressures being faced by micro, small and medium enterprises. The ability to effectively speed up these pay-outs, however, depends on the central government’s ability to manage its fiscal condition.

Finance Minister Nirmala Sitharaman announced a fund of Rs 20,000 crore billion (Rs 10,000 crore to be funded by the government) for extending last-mile funding for affordable and middle income housing.

While this is likely to provide support to under-construction projects that are in advanced stages of completion, Ind-Ra said it is unlikely to stoke demand for housing at large. In fact, it could lead to higher supply in the affordable and middle-income housing segment which has already been recording increased construction activity over the last three to five years.

Also, the measures will only support viable projects and as such are unlikely to revive projects that have witnessed diversion of funds by the promoters or are otherwise unviable. As the growth in supply might not necessarily be accompanied by a pickup in demand over the near term, it will put pressure on both realisations and inventory levels.

Additionally, mobilising the required capital from domestic and foreign institutions amid a consumption shock driven slowdown in the economy may prove to be a challenging task even for the government. In the real estate sector, both price and income elasticity of demand are high.

In such a case, a fall in prices accompanied by an improvement in visibility of future household income will be essential to reach a new equilibrium point.

However, measures to stimulate export credit are likely to mitigate the financing risks being faced by exporters. Revisions in priority sector lending norms coupled with a higher degree of coverage provided by Export Credit Guarantee Corporation for exports will not only increase the ease of financing but also result in substantial cost savings for exporters.

Moreover, the availability of a higher insurance cover could help extenuate banks’ loss expectations on the advances provided to these segments. While these measures are likely to provide some relief to the exporters, the business risks arising from an elongation in the working capital cycles and moderating revenue visibility are likely to persist and have a more debilitating impact on the exporters’ credit risk profiles.

“Over the near term, however, such measures are unlikely to stimulate export growth, considering the elevated trade tensions and slowdown in consumption demand globally,” said Ind-Ra.

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