Column : Prowess of Indias CapEx

Written by Mahesh Vyas | Updated: Mar 17 2012, 05:30am hrs
Fiscal 2011-12 has been a very disappointing year for investments. Official statistics show that the production of capital goods declined by 2.9% in the first three quarters and growth in fixed capital formation declined by 0.2%. The Budget speech did not contain any policy intervention that would change this direction. The reduction in coal import duties and more tax-free bonds from public sector infrastructure companies will help, but these are not direction changers. Still I believe the direction will change because there is much in the pipeline to sustain capex for a few more yearshappily independent of government largesse.

Capital goods production started showing signs of weakness early in 2011. By July, it was in the negative zonelower than it was in the corresponding period of the previous year. During the July-September 2011 quarter, capital goods production was 5.8% lower than it was a year ago. In the quarter ended December, the y-o-y decline worsened to (-)16.2%.

The recovery in the capital goods index from its fall after the 2008 crisis was almost entirely lost by the December 2011 quarter, when the index was at the same level as it was three years ago in the December 2008 quarter.

This decline in the production of capital goods is reflected in the quarterly GDP growth estimates. Gross fixed capital formation (GFCF) during two consecutive quartersthe September and December 2011 quarterswere lower than their respective levels a year ago. Two consecutive quarters of a y-o-y fall in the GFCF have never been seen in the quarterly GDP growth seriesnot even in the aftermath of the 2008 crisis. So, is this a confirmation of the end of the investment cycle Or, is it worse

Two consecutive quarters of decline certainly look ominous. Particularly when they follow two quarters that barely remained above water (0.4 and 5%, in the quarters ended March and June 2011). A simple projection for the year indicates the growth in real GFCF will be of the order of 2% in 2011-12. But the growth in real GFCF (closest indicator of investments in the official statistical system) does not quite connect with the behaviour of companies. For example, growth in real GFCF shows that investment growth peaked in 2004-05, while the growth in company assets (closest indicator of investments in companies financial statements) showed the peak was in 2008-09. Also, while companies report a peak in 2008-09 and a sustained high growth of net fixed assets in 2008-09, the official statistics show a sharp fall in 2008-09 and a continuation of the low level of growth in capital formation in 2009-10.

The net fixed assets of non-finance companies are sourced from the published Annual Reports of over 5,000 companies. CMIEs Prowess database provides the complete details of these growth rates. A completely independent database also built by CMIECapExcorroborates the trend seen in the Prowess database. The CapEx database tracks the announcement and completion of individual projects that create new capacities. The CapEx database shows that the completion of projects shot up substantially in 2008-09 and then peaked in 2009-10. Thus, both Prowess and CapEx indicate that the investments boom peaked some time during 2008-09 and 2009-10. This runs completely against the official statistics that indicate that the investment boom came to a near halt during these two years. Interestingly, the CapEx database indicates that the creation of new capacities continues into 2010-11.

The CapEx database has a wider canvass compared to the Prowess database. It covers all kinds of projects to create new capacitiesincluding those being created by governments and other non-company entities. Prowess on the other hand is limited to companies for which the official unabridged audited annual financial statements are available.

The CapEx database is also futuristic. It provides information on the scheduled completion of projects in the coming years. These are based on claims made by company managements. These promises indicate over R8 billion worth of projects would be commissioned in 2011-12 and also in 2012-13. However, past records show that only about half of these projections turn out to be correct. Thus, we expect only about R4 billion worth of projects are likely to be completed during 2011-12 and in 2012-13. But, R4 billion worth of new capacities being created in the current and the next year implies the continuation of healthy growth in investments.

The fall in capital goods production and in GFCF remains a mystery that needs to be unravelled. The official statistics show a fall in the growth in capital formation in the public sectors to 5-6% in 2009-10 and 2010-11 compared to 14-16% growth per annum in the preceding years. Government spending will grow in 2012-13. The Plan expenditure is budgeted to grow by 22% in the year compared to the revised estimates of 2011-12. Maybe, this will fix part of the problem.