Even at a time when corporate investment remains tepid, savings of private sector companies have risen significantly. This may have prompted finance minister Arun Jaitley to nudge private sector to give up caution, make investments and drive the economy.
In FY15, private sector companies had gross savings of Rs 15,85,120 crore or 12.7% of GDP, as compared to Rs 8,26,805 crore or 9.5% of GDP in FY12—the year from when private investment started faltering. So, in the three-year period, private sector savings nearly doubled. In contrast, private corporate sector investment in FY15 was Rs 15,37,972 crore or 12.3% of GDP, a level achieved in FY11.
Data from the Central Statistical Office on savings and capital formation show that private non-financial corporations account for 89% of total private sector savings. The year-on-year growth in savings of this segment was faster than financial corporations for the past four years. India’s largest private sector company by revenue, Reliance Industries, had a cash pile of Rs 91,736 crore as on December 31, 2015, and Vedanta had Rs 45,716 crore as on September last year.
The country’s overall investment has declined from a peak of 38% of GDP in FY08 to 30.8% in FY15, and is likely to fall further to 29.4% in FY16, according to the advance estimates of national accounting. Private corporate sector investment, which peaked at 17.3% of GDP in FY08, has failed to pick up from the slump of FY13, as stalled projects mounted. In fact, there was much hope that kick-starting the stalled projects by providing the required clearances would lead to some revival in private investment. While the NDA government did take some major steps to revive investments, the green shoots are yet to take roots.
Cost and time overruns and slower-than-expected growth in the economy have made many capital-intensive projects financially unviable and companies are reluctant to invest. Banks are no longer aggressively lending to large projects, especially in stressed assets concentrated in capital-intensive sectors such as power, metals and mining, which account for more than 60% of the overall corporate capex. In such a case, any significant improvement in investment in other less-capital-intensive sectors will not be large enough to push overall private investment. Capacity utilisation in factories has remained in the range of 70-75% for the past two years, clearly indicating excess capacity in manufacturing sector.
Stressed advances of the banking system touched 11.3% in quarter-ended September 2015 from 11.1% in the three months to March 2015, and state-owned banks recorded the highest level of stressed assets at 14.1% in September last year as compared with 4.6% for private sector banks. Sectors such as mining, iron and steel, textiles, infrastructure, and aviation, which together constituted 24.2% of the total advances of banks as of June last year, contributed to 53% of the total stressed advances. So, the performance of these sectors and their impact on the asset quality of banks continues to be a matter of concern.
However, much of the fillip came in from public investment as the Mid-Year Economic Review shows that aggregate capital expenditure of the Centre and states has gone up by 0.5 percentage point of GDP in H1-FY16—indicating a real expenditure growth of 25%. Public sector investment is relatively smaller source of capital formation and reviving private investment growth will be a critical challenge for the government. Private investment demand is more dependent on external funding and it usually takes longer to revive. On the other hand, government spending can play an important role in supporting revival of growth. However, if higher spending is not met with higher revenues, fiscal deficit can increase.
In a research note, Pranjul Bhandari, chief economist, HSBC Securities and Capital Markets (India), underlines that efforts to support growth by increasing government spending could put pressure on interest rates and exacerbate public debt. Higher interest rates will keep private sector away from investing, which, at present, accounts for 70% of the nation’s investment spending.
With household savings dropping to 19.1% of GDP in FY15 from a peak of 25.2% in FY10 and public sector savings stagnating at the 1.2% range for the past four years, much of the private sector savings need to be invested in capital formation for any meaningful push to the growth of the economy. For that to happen, constraints for private capex need to be resolved at the earliest, banks must identify stressed loan at an early stage, and the Bankruptcy Code—which will go a long way in strengthening creditors rights in India—needs to be passed by Parliament in the Budget session.