If weak private sector participation in capital expenditure in the economy has been a big concern for the overall expansion of the economy, the steady growth in consumption over the last couple of years, growing capacity constraints in sectors such as automobile and steel among others may make it inevitable for India Inc to start investing in capacity expansion in 2019 even if Indian economy grows at 7 per cent, say economists.
While Reserve Bank of India data shows that the capacity utilisation hit a high of 75.2 per cent in the quarter ended March 2018, it fell to 73.8 per cent in April-June 2018 and, therefore, it remains to be seen if there was any improvement in the second quarter. Economists feel that though some sectors may not be doing as well on this indicator, there are others that may see capacity constraints creeping in and would thereby see the need for setting up additional capacity.
“I think the private investment is now ready for an upturn as capacity constraints would hit in one-two years. Therefore, investments have to start happening now in order to prepare for the same. Among sectors, while the automobile sector has already seen capacity constraints coming in and the investments also started happening, others may also start to see fresh investments on capacity expansion,” said DK Joshi, chief economist, Crisil.
Joshi added that as investments have not happened over the last few years despite consumption growth pushing capacity utilisation across several sectors, the capacity should now increase.
The rise in investments will, however, be driven by the government, which has been the primary driver of investments over the last couple of years at least.
Tanvee Gupta Jain, economist, UBS Securities, said, “While consumption demand will normalise, we expect improving capacity utilisation levels, strengthening of banks’ balance sheets and tailwinds of GST implementation to provide a conducive environment for investment growth to pick up from late FY20.”
She, however, pointed that headwinds including tighter financial conditions, high oil prices, slowing global growth and a still muted private corporate capex (capital expenditure) recovery are weighing on India’s growth momentum.
A report by Care Ratings stated that while gross fixed capital formation, which refers to net investment, has improved from 28.3 per cent in first half of FY18 to 29 per cent in the first half of this fiscal, it has been government investment that has driven the same.
“The contribution of the government can be best explained by the expenditure patterns witnessed so far on the capex front. Overall capex in the first seven months of the year of the government was Rs 1.77 lakh crore as against Rs 1.62 lakh crore last year. Clearly the government has been proactive on this front with its contribution to investment,” said the report prepared by Madan Sabnavis, chief economist at Care Ratings.
But that may not sustain in the second half of FY19, points out the UBS report. “The benign recovery in fixed capex growth seen over the past few months is also likely to moderate in H2, in our view, as the government lowers capital expenditure (given budget constraints) and investment decisions get delayed (due to political uncertainties ahead of elections),” said Jain.
Even on the private sector front, Care Ratings points towards an improvement over the last couple of quarters. Since IIP growth can be taken as an indicator for growth in capital goods sector, the IIP growth for the first seven months of the year indicates that capital goods cumulatively increased by 8.6 per cent compared to 0.7 per cent last year. Even for machinery, there is a revival in growth. Data shows that for electrical machinery on a cumulative basis (April-October) increased by 3.8 per cent (-15.7 per cent) and non-electrical by 7.3 per cent (3.9 per cent).
The DIPP data on investment proposal, as per the Industrial Entrepreneurs Memorandum (IEM), shows that 1,745 investment proposals were made in the ten-month period between January and October, compared to 1,642 during the same time last year. However, in terms of value, it was lower at Rs 3.42 lakh crore this year as against Rs 3.49 lakh crore last year.
CMIE data of announced, completed and abandoned projects for H1 FY18 and H1 FY19 shows that while new investments announced rose from Rs 4.27 lakh crore to Rs 4.56 lakh crore, respectively, the value of investment projects completed rose marginally from Rs 2.13 lakh crore to Rs 2.19 lakh crore.
While the growth witnessed this year is not very encouraging, the factors that will be critical to watch next year with regards to growth in private sector capex would be improvement in capacity utilisation rates, impact of liquidity challenges in October to November on investment intentions as well as physical investment.
RBI data shows that the credit growth for personal loan segment which had crossed 20 per cent in January and February and then stood at around 19 per cent in April and May, moderated sharply to 15.1 and 16.8 per cent in September and October respectively. While the gross bank credit rose to 13.1 per cent in October, it was primarily led by credit demand from the services sector which stood at a high of 27.4 per cent in October.
Thus for capacity utilisations to rise, a growth in consumption demand remains a critical element and thus a healthy liquidity scenario remains important for the overall growth of investment from India Inc.