The environment arising from the factors - high and rising international oil prices, increasing cost of external capital, hardening of interest rates abroad and input and wage cost pressures in some industries- could become less conducive for the fixed investment due to its cyclical nature, said RBI in the study, Corporate investment: growth in 2007-09 & Prospects for 2008-09.
The study shows that Gujarat continues to hold the top rank with the proposed investment of Rs 62,442 crore from 100 projects contributing 22% of the total investment intentions followed distantly by Maharashtra, Orissa and Andhra Pradesh in 2007-08.
However, the study also said that though the risks to the outlook for fixed investment growth has somewhat tilted to the downside, the domestic demand is still resilient and supporting the overall economic growth, driving corporates to continue their expansion plans at the back of rising capacity constraints.
The capital investment intention for 2008-09 based on companies having institutional assistance up to 2007-08 aggregated to Rs 1,48,350 crore, as against Rs 1,25,248 crore envisaged for the year 2007-08.
The proposed investment aggregates to Rs 1,73,173 crore in 2008-09 if the capital spending envisaged by companies raising funds from sources other than banks and FIs was also added to this. The capital expenditure envisaged by the fresh projects in the private corporate sector has been above Rs 1,00,000 crore in each of the last two years. Though there could be a slight shift from accommodative to neutral financing conditions which may affect the fundamentals that drive business investment, corporates incentives to invest are likely to remain strong in 2008-09, namely high domestic demand and high capacity utilisation rates amidst improved profitability of last few years.
As business confidence continues to remain strong, such an amount of fresh investment by private corporate sector is expected in 2008-09. Thus, the private corporate investment in 2008-09 is likely to increase, although at a slower pace.
The study says that the total capital spending envisaged for the year 2007-08 was higher at Rs 2,45,107 crore, which though indicates a moderation in annual growth over a high base, still reflects sustained strong capital expenditure.
Infrastructure projects, particularly, the power projects continue to dominate the scene for two consecutive years in a row.
The total cost of projects sanctioned institutional assistance in 2007-08 at Rs 2,84,371 crore was to a great extent due to the rise in number of large projects from 88 to 98, each with project cost exceeding Rs 500 crore, and aggregating as much as Rs 2,07,037 crore. Robust growth of capital goods production, increase in import of capital goods, high capacity utilisation, healthy level of profitability witnessed by corporate sector on top of strong balance sheets in past few years and high economic growth in 2007-08 signal continued momentum in fixed capital investment.
The turnaround in corporate investment, which began in 2002-03 and maintained healthy position thereafter, is expected to be sustained in 2008-09.
The real GDP grew at a substantially high rate in 2007-08, on top of robust economic growth in recent years. During the first quarter review of the annual policy, the central bank projected real GDP growth for 2008-09 to around 8%.
Notwithstanding recent slowdown in overall business activities, corporate sector managed to maintain quite decent profitability level in 2007-08 and against the backdrop of upbeat performance in recent years, the corporate sector
appears to have the capacity to invest.