Column : Investment continues to boom

Written by Mahesh Vyas | Mahesh Vyas | Updated: Aug 1 2010, 03:18am hrs
The latest data from CMIEs CapEx database indicates that investments into fresh capacities continue to boom. During the quarter ended June 2010, the CapEx database recorded 900 new project announcements to invest Rs 5.8 lakh crore.

Statistically, this is the second largest amount of fresh investments proposed in a quarter. The highest fresh investment proposals were made in the quarter ended March 2009 when Gujarat held its Vibrant Gujarat show. Total fresh investment proposals in that quarter peaked at Rs 8.8 lakh crore. Of this, the show had attracted fresh investment proposals worth Rs 3.6 lakh crore. However, most of these were mere announcements and have not made much progress. Thus, net of the Vibrant Gujarats Rs 3.6 lakh crore, the new investments attracted during the March 2009 quarter was Rs 5.2 lakh crore.

The June 2010 quarters fresh investments spike is also influenced partly by the Global Investors Meet organised by the Karnataka government during this quarter, which claims that the meet attracted investments worth a whopping Rs 5 lakh crore. However, details are available only for projects worth Rs 86,731 crore. Net of these, the fresh investments in the June 2010 quarter was an impressive Rs 5 lakh crore. This compares well with the earlier peak in March 2009 as well as with the average fresh investment of Rs 3.5 lakh crore per quarter in the preceding four quarters. This is a good indication that the investments boom continues to soar and corporates feel confident of the sustainability of the growth in demand.

Corporate sales and profits are expected to grow well in the coming four quarters. Growth is expected to be robust in sales, initially. Growth in profits is expected to accelerate in the last two quarters of the current fiscal year. Profit margins have hovered around 8% and are expected to remain at these levels. Evidently, at these profit margin levels, corporate India is enthusiastic about investing.

The boom in investment proposals since 2004 is bearing fruit in fresh capacities being added to the order of Rs 6.5 lakh crore in 2010-11. This is much higher than the Rs 3.7 lakh crore worth of project commissionings recorded in 2009-10, which was higher than the Rs 2.9 lakh crore in 2008-09 and the Rs 2.3 lakh crore in 2007-08. The total value of projects commissioned in 2009-10, currently at Rs 3.7 lakh crore, is expected to go up to Rs 4 lakh crore as new data becomes available.

Various projects that were in the initial proposal stages or that were suspended in the 2008 crisis have revived. Anecdotal evidence point towards an acceleration in the pace of implementation of investment projects. The CapEx database shows that investments worth more than Rs 10 lakh crore will be commissioned in 2011-12. But we expect this number to decline substantially as often claims regarding commissioning that are more than 12 months into the future are subject to a lot of revision. Nevertheless, even after discounting for such revisions, it is apparent that the current investment boom is likely to continue for a few more years. It is likely that investments worth Rs 8 lakh crore or more will be commissioned in each of the coming three years.

The sustained interest of corporate India in announcing new investment projects indicates that the boom may sustain itself a lot longer than just the next three years. The current investment boom is driven largely by domestic consumption demand. In the coming 2-3 years, if the global economy recovers fully, it will only strengthen this boom in India. The downside risks are limited.

A global financial crisis in 2008 followed by a drought in 2009 did not stop this investment juggernaut; it is unlikely that a hike in interest rates would.

The commissioning of fresh projects is expected to push up capacities in a number of industries. The electricity sector is expected to see a capacity addition of 16,144 mw in 2010-11. The sector has never seen such a huge increase in capacity. Other industries aresteel (15.5 million tonnes), aluminium (1.3 million tonnes), cement (41.7 million tonnes) and hotel (22,672 rooms).

This substantial increase in new capacities should reflect in the official gross fixed capital formation growth estimates. Real gross fixed capital formation had increased by 7.2% in 2009-10. We expect this to accelerate to 12% in 2010-11 and then to revert to the 15% growth that it had clocked before the 2008-09 crisis.

Interestingly, the differences between official statistics and independent statistics continue to intrigue. In 2008-09, according to official statistics real gross fixed capital formation growth fell sharply to 4% compared to a 15% per annum growth recorded in the preceding three years.

However, the annual accounts of over 8,000 non-finance companies show that the nominal growth in gross fixed assets accelerated to 19% in 2008-09 after having grown by around 14% in the preceding three years. Even after adjusting for inflation, the difference in direction and quantum is intriguing. If we believe the official statistics, then investments growth had collapsed in 2008-09. If we use independent statistics as seen in CMIEs Prowess and CapEx databases, then investments were not impacted by the 2008-09 global financial crisis.

The author heads the Centre for Monitoring Indian Economy