Capex crunch

Written by Saikat Neogi | Updated: Sep 25 2014, 07:20am hrs
The slowdown in the economy and policy paralysis during the UPA regime took a heavy toll on India Incs capital expenditure. From a high of R3.7 lakh crore in FY11, total capital expenditure declined to R2.5 lakh crore in FY14, reflecting weak business sentiments. Even at the macro level, the decline in the growth of capital expenditure can be seen in gross fixed capital formation that dropped from 30.9% of GDP in FY11 to 28.3% in FY14.

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Even data on proposed industrial investments show the slumpit declined to R4.6 lakh crore in FY14 from R16.6 lakh crore in FY11, and the number of investment proposals dropped from 4,289 in FY11 to 2,283 during the period. An analysis done by CARE Ratings shows Odisha, Maharashtra, Gujarat and Chhattisgarh received 55.7% of the total capital expenditure envisaged in FY14. Sector-wise, power sector accounted for 33.4% of the total capital expenditure, followed by metals, textiles and cement.

While banks and financial institutions are the biggest source of funding for India Incs capital expenditure, the share of external commercial borrowings (ECBs) for capital formation has been increasing for the past three years. The share of ECBs in capital formation grew from 8.6% of the total funding in FY11 to 31.4% in FY14 as the interest rates in the US touched historically low levels after the global financial crises. Moreover, RBI raised limits for ECBs in FY14 which helped companies tap more foreign funds.

Going forward, the ratings agency expects capex to be around R1.24 lakh crore in FY15, which is less than half of last years amount. However, if stalled projects start functioning and the central bank cuts rate, then capital expenditure can gain some traction.