Column : Pipeline to heaven

Written by Mahesh Vyas | Updated: Dec 31 2011, 06:17am hrs
The announcement of fresh investment proposals fell sharply during 2011. A mere R10 trillion worth of new proposals were made during the year. This is a precipitous fall from the R18-20 trillion worth of proposals that were being made in each of the preceding four years.

Fresh investment proposals, according to CMIEs CapEx database, ramped up quickly after languishing at around R2 trillion per annum for seven years from 1997 through 2003. In 2004, fresh investment proposals touched R4 trillion. They crossed R7 trillion in 2005, then more than doubled to R16 trillion in 2006 before peaking at R20 trillion in 2007. Calendar 2008 and 2009 also saw handsome levels of R19-20 trillion. Fresh investment proposals during this period were 10 times the levels in 2002. The fall in fresh

investment proposals in 2011 has been interpreted as a sign of the end of the investments cycle. However, this is an erroneous conclusion.

There are no investments cycle that can be discerned from the data. The CapEx database goes back till 1995 and it does not indicate any. The official

national accounts statistics goes back to the 1950s and this not indicate any either. Neither the growth in gross fixed capital formation nor its proportion to the gross domestic product indicate any cyclicality. The data only indicates that the growth in investments and its proportion to GDP since 2004 have been exceptionally high.

So, there is no reason to believe that the fall in fresh investment proposals in 2011 is the beginning of a downturn that follows some cyclical pattern. The large pipeline of projects created in the past seven years is expected to sustain the creation of new capacities for several years to come. The value of all projects on hand as of December 2011 was R139 trillion. Over half of these (R77 trillion) have moved beyond the stage of a mere announcement. They have made at least some progress in implementation. These projects alone could feed the creation of new capacities for another 20 years at the rate at which projects have been commissioned during the recent investment boom years. Alternately, in the coming few years, the creation of new capacities will grow to much higher levels than in the recent past. This is the power of the investment boom seen in recent times.

The country does not need new investment proposals to sustain the capex boom in the near to medium future. The current pipeline of projects under implementation is good enough for an accelerated growth rate. The focus needs to shift to implementation and completion.

According to announcements made by companies, projects worth R2 trillion were due for completion during the last quarter of 2011. We expect less than half of these to get completed during this period. So far, only 10% has been completed, but completion announcements or confirmation become available with substantial lags. If, eventually, only 40% of the scheduled projects do get commissioned during this period, 2011 will end with a total commissioning of R3.5 trillion since R2.7 trillion worth of projects were

already commissioned during the first nine months of the year.

The CapEx database indicates that the completion of investment projects peaked at R3.7 trillion in 2009. It fell a tad to R3.3 trillion in 2010. The explanation provided above indicates that we expect this to pick up again to about R3.5 trillion in 2011. And the pipeline for the future is very large. However, implementation of projects has slowed down in spite of this fat pipeline. As a

result, the completion of projects in 2011 have

been running substantially behind schedules.

There are several reasons for this slowing down of implementation in 2011. First, capacities grew at an extraordinary pace in the preceding five years. This is likely to have led to some slackening of the capacity utilisation levels, in which case further expansion of capacities could be delayed by a few months till demand catches up with the new capacities. Second, many large projects have been entangled in land acquisition issues, and the Union and state governments have, in recent times, started re-looking at the entire issue of land acquisition. Many state governments have clearly stated that they would not acquire land for private sector projects. Some acquisitions have become too controversial. Third, problems in the availability of minerals such as coal, iron ore and natural gas for a variety of reasons has delayed the completion of some projects that depend upon these raw materials. Fourth, high interest rates are likely to have led to at least some projects delaying the completion of their projects in the expectation that interest rates would decline from current levels. Fifth, the strident anti-corruption movement and the clear possibility of industrialists, professionals, ministers and bureaucrats facing imprisonment or even conviction will have derailed some projects that were possibly not exactly clean.

Last, poor government statistics (such as the index of industrial production) have incorrectly painted such a negative picture of the economy that it has instilled at least some fears in industrialists that there could indeed be an economic crisis on the anvil. Fixing the creaky official statistical machinery is still not a priority for the government.

Individually, none of the above-mentioned problems are serious. But, collectively, they have impacted (albeit only marginally) the implementation of projects that are in the pipeline. None of these problems can be solved quickly. However, there is no structural problem that hurts the growth of investments. And there is no cyclicality at play.

The build-up of the investments pipeline was strong enough to withstand the global financial crisis of late 2008. Investments commissioned increased from R2.8 trillion in 2008 to a peak of R3.7 trillion in 2009. These have continued to remain high at close to R3.5 trillion even thereafter in spite of a variety of problems. The scheduled completion of projects indicates very large capacity creation in the coming two years. Existing bottlenecks can push the implementation a little more into the future. But this fat pipeline of projects will not vanish into thin air.

The author is MD & CEO,

Centre for Monitoring Indian Economy