The record 56.2% expansion in capital goods output in January, as shown in the industrial production data released last week, comes upon a 200% spurt in import of capital goods in the five years up to 2008-09. This bears out the Indian manufacturing industry?s unrelenting faith in the untapped potential of domestically driven growth and brightens the prospect of a sharp pick-up investment growth in 2010-11. Private corporate sector is fast recapturing whatever investment space temporarily taken from it by the public sector companies in 2008-09, a year in which the overall investment growth declined 2.4% and investment in industry dipped an even sharper 17.6%.
Prime Minister?s Economic Advisory Council chairman C Rangarajan told FE: ?The high growth in capital goods in the latest IIP (Index of Industrial Production) data confirms our earlier prediction that investment rate would pick up by the end of the current fiscal. The robust growth in capital goods output would indeed result in a much higher level of investment growth next fiscal.?
Import of capital goods increased from Rs 83,424 crore in 2004-05 to Rs 2,61,311 crore in 2008-09, the year whose latter half saw the worst effect of the global meltdown. The steepest hike in import was that of electrical equipment (42% in 2008-09), thanks to the rigorous implementation of big thermal power projects that mostly use Chinese machinery. The growth in import of nuclear reactors and boilers slowed down to 19% in 2008-09, from an average of 36% in the three years before, but analysts expect import of these capital goods also to accelerate from next fiscal.
While domestic demand is the principal driver of expansion in capital goods sector, in a slew of sectors like textiles, chemicals and food processing, export demand is also a major factor that spurs investment. The investment binge in textile and garment industries which was temporarily interrupted by the global crisis, has already resumed, Confederation of Indian Textile Industry secretary-general DK Nair said. Of late, there has been a pick-up in both production and investment in the sector, Nair said. Similarly, the food processing industry is about to witness an unprecedented jump in investments, thanks to the mega food parks scheme.
Federation of Indian Export Organisations (FIEO) president A Sakthivel said,? Higher exports are leading to increased imports under the Export Promotion Capital Goods Scheme. The fact that zero-duty EPCG benefit for selected sectors is available only till March 2011 has resulted in a rush to import capital goods.?
The unorganised manufacturing sector, which reported a sharp 42% decline in investment in 2008-09, is expected to look up too, thanks to the pick-up in domestic consumption as well as exports. A series of measures being taken by the government to increase the credit availability to the sector would also help.
The Budget decision to allow zero-duty import of capital goods for the farm sector is expected to buttress the ?welcome rebound? in investment in the agriculture sector (26% in 2008-09) highlighted by this year?s economic survey.
The investment spree in the port sector would be the chief growth driver in logistic equipment sector. Also, the revival of the pent-up ?investment demand? from infrastructure industries could contribute to the imports and domestic production of various capital goods in the months to come.