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NEW DELHI : As the economy struggles to recover amid a fresh wave of Covid-19, the upcoming Union Budget can provide the much-needed predictability and stability to revive investments in the country, said a report by HSBC Global Research.
It said that as pent-up services demand runs its course, growth could begin to slow in the second half the next financial year and that is when investments are expected to step in.
The report noted has four variables for an investment model -- world growth, a corporate indebtedness metric, a policy uncertainty index, and excess growth returns. Each of these has pushed investment lower in the last decade, it said.
"Now, two of the four -- world growth and corporate balance sheets -- have become supportive of a revival," it said, adding that the other two variables, policy uncertainty and excess growth returns, which tend to be tightly interlinked in periods of high volatility, have not turned supporting for revival.
It added that in the most recent period when corporate debt has fallen, its importance in driving the investment cycle has fallen, too, suggesting that strong balance sheets may not be enough for an investment revival.
"Something more is needed. Indeed, around the same time, the importance of growth returns has risen sharply. Against this backdrop, unless policy uncertainty falls and the prospects of economic growth rise, the investment cycle uptick may not be strong footed," the HSBC report said.
It observed that recent trends in domestic goods demand show that after reaching pre-pandemic levels it has stagnated. The production-linked incentive (PLI) schemes were meant to enable firms to cater to global demand, but rising import tariffs are coming in the way. Further, sticky inflation is likely to elicit an RBI response and tighter liquidity could impact capital market excesses.
"At a time of heightened exogenous shocks, government policy can be a source of stability and predictability, prerequisites for investment revival. And it could start with the budget on 1 February," it said.
The HSBC report said that last year's budget had a lot of positives including "transparent accounts, credible estimates, high-quality spending, gradual consolidation, and tax policy stability" and sticking to these can go a long way.
Alongside, effective implementation of some already announced reforms -- fiscal, financial, and manufacturing -- could help set the stage for strong growth once pent-up demand fades, it added.
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