May 3, 2011 1:39:47 am
Maintaining the investments momentum is critically important if India aims to sustain a growth of 9% per annum over the next few years. It is also equally critical to ensure that the expected rise in population of the educated classes is met with sufficient employment opportunities. The middle classes have been aggressive in ensuring that their children get significant higher education. If these are faced with a paucity of jobs or if the jobs are not as lucrative as they were expected to be when the families invested in education,then the potential social disharmony could be a possible disaster.
The deliberate alarmist tone of the above paragraph has a purpose. It is to draw attention to the possibility that the investments cycle that began sometime in 2004 may be losing its momentum. And,if this is indeed true,it would be wise to at least not accelerate the process of its decline by policy interventions.
CMIEs CapEx database has thrown up three disturbing signals. The first is that the pace of announcement of new investments has fallen substantially. New investment announcements amounted to R2.63 trillion in the quarter ended March,2011. This was lower than the R2.92 trillion in the preceding quarter,which,in turn,was lower than the R3.57 trillion worth of new announcements made in the earlier quarter. The average value of new investment announcements in the past three quarters,at about R3 trillion per quarter is nearly half the R5.8 trillion per quarter average in the preceding three quarters.
The total new investments announced in 2010-11 were lower than in 2009-10. This,and the persistence in the fall in quarterly new investment announcements,indicates a possible slowing down.
The second disturbing signal from the CapEx database is the significant delay in the commissioning of projects. In 2010-11,projects worth R8 trillion were expected to be commissioned,as per schedules given by companies. Usually,we discount such projections and had,therefore,expected a commissioning of projects worth R6.5 trillion. By the end of the year,only R2.63 trillion worth of projects were reported to be commissioned.
It is likely that some of the remaining projects will be commissioned with a lag and the R2.63 trillion number may go up a bit. But,even in such a case,we do not expect it to rise higher than the R3.84 trillion worth of projects that were commissioned in 2009-10. This is the first year in which the commissioning of new capacities has fallen over the preceding year since the beginning of the current investments boom in 2004.
The third disturbing signal from the CapEx database is the sudden rise in projects abandoned in the March,2011 quarter. Projects abandoned amounted to R516 billion in the quarter. This is very high compared to an average of about R250 billion a quarter. Most of the projects abandoned during the March,2011 quarter were in the construction sector. This is possibly a localised problem associated with SEZs. Nevertheless,it is disturbing to see a sudden and sharp increase in investment projects being abandoned.
Has the investment climate suddenly turned sour? Not exactly,but this are not the best of times either. The aggregate investments being proposed,under implementation or being commissioned,are still quite high. The slowing down is likely to be a temporary phenomenon since sales growth is still quite good and profit margins are still high.
Early earnings announcements for the March,2011 quarter by listed companies suggest that their top-line has maintained the over 20% year-on-year growth that it has in most quarters. The recovery from the precipitous fall of 2009 is complete. Net profit margins are robust at around 8%.
Thus,India Inc has good reasons to continue to invest. However,this is a vulnerable moment. India Inc is beleaguered by scams and its projects are entangled in environmental checks,local resistances and,in some cases such as power,the lack of raw materials. None of this is new,but this time the decibel levels are higher,the personalities involved in potential problems are bigger and the mood amongst those that matter in issues related to large investments is more sombre. In this background,the three signs of a slowdown in investments is ominous.
The availability of finance or its cost has not been of serious concern in the current investments momentum. A sustained increase in domestic demand is the primary engine of the current investment growth. However,this demand is dependent,to a large extent,on the availability and cost of finance.
If an increase in interest rates is large enough to curtail consumption demand,or even seriously threaten to curtail demand,then the current sign of slowing down of investment demand could easily turn into a real slow down. If this happens,it would not be easy to re-start the investment process.
An acceleration in the creation of new capacities is a better way to curtail inflation than by depression of demand. This is true today because India Inc already has projects on hand that can turn into capacities. It is better that India Inc battles issues related to proper land acquisition,environmental clearances and graft rather than worry about a liquidity crunch.
The author is MD & CEO,CMIE
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