CMIE pointed out in a special report in December 2008 that the financials of Indian corporates were robust and investment plans were on track, save for a few delays. The only serious re-thinking on investments then was on new project announcements. By March 2009, there was strong evidence that fears of investments being in deep danger were highly misplaced. Now once again, doubts are being raised regarding the investments boom. We deal with some of the evidences of the slowdown being forwarded: 1. Production and import of capital goods have been declining. Production declined y-o-y for three consecutive months between March 2009 and May 2009. Imports have been falling since October 2008. If these are evidences to show that investments are slowing down, then how does one reconcile them with the order books of capital goods companies that on an average equal 2.8 years of sales Bhel has an order book of 4.4 years of its sales. Obviously, then, the fall in production and imports was not because of lack of domestic demand.
It is more likely that the fall in capital goods imports has more to do with the global recession since October 08. And, the production of capital goods grew by a handsome 11.8 per cent in June 2009. Has the trend reversed already Well, the IIP is still being mended and there could be surprises.
2. New investment announcements as seen in CMIEs capex database were down to a trickle in the April-June 2009 quarter. At Rs 1.2 trillion these were less than a quarter of the average seen in the preceding several quarters and was the lowest level since June 2005.
But, this is misunderstood to be a sign of slowing investments growth. If this does indicate a slowdown in investments, such a slowdown will occur after three years. For, in 2009-10, the same capex database shows a record completion of investment projects worth Rs 5.6 trillion. This is more than twice the projects commissioned in the previous year. And, such a high level of investments growth is expected to continue or even accelerate for at least another two years.
3. A study of 500 projects by rating agency, Crisil, shows that growth in capex spending will decline from 30 per cent per annum during the three years ended 08-09, to 7 per cent per annum in the coming three years. If this is indeed true it implies a very sharp fall in the growth of investments.
But, CMIEs Prowess and capex databases do not agree with these figures. According to Prowess, Indian corporates have never seen their fixed assets grow by 30 per cent per annum in any three year period at least in the past two decades. And, in the three years from 2006-07 to 2008-09, the growth in fixed assets was a shade over 18 per cent per annum. The growth in the increase in gross fixed assets, which is a better measure of investments, grew by a shade less than 18 per cent per annum in the same three year period.
And, the capex database shows that investments will accelerate in the coming years. The database shows investments worth Rs 10-12 trillion getting commissioned in the next two years compared to the Rs 5.6 trillion worth of investments getting commissioned in the current year.
Given sufficient liquidity, the investments boom will continue for at least a few more years. Historically, interest rates have been less of a bother for enterprises hunger for investments. But, lack of liquidity has been a serious dampener of growth. In the mid-1990s, investments, as seen in the growth of gross fixed assets of companies grew at a handsome clip in spite of the sharp increase in interest costs. We use data from CMIEs Prowess database to make this point.
The GFA of manufacturing companies grew by 20.4 per cent per annum between 1993-94 and 1997-98. That of all non-finance companies (ie including even the mining, construction, utilities and services companies but excluding banks and other finance companies) grew by 18.8 per cent per annum. During this time, interest rates were the highest. Corporates paid twice the rates then compared to the rates paid in recent years. This investment boom was cut short by a severe curtailment of liquidity beginning November 1997. CRR was raised in December 1997 and January 1998. As a result, in contrast to the mid-1990s, during the late-1990s, although interest rates were down to half their levels in the mid-1990s, the GFA growth of the corporates had slowed down to single digits. As liquidity improved in the mid-2000s thanks to access to overseas funds, investments picked up again.
The liquidity crisis in September-October 2008 could have derailed the current investments boom. The timely intervention of RBI to infuse liquidity saved the day and the investments rally has continued after a small, albeit severe interruption.
The author heads the Centre for Monitoring Indian Economy