Policy paralysis, global uncertainties and high interest rates have combined to stall capacity addition in the country. The September 2011 quarter saw new investments worth only R2.6 lakh crore, a nine-quarter low, reveal data from the Centre for Monitoring Indian Economy (CMIE). This is about 64% below the peak of R7.2 lakh crore achieved in the June 2010 quarter.
Moreover, the total value of projects being implemented, which had been steadily rising over the last five quarters, has slipped to just under R67.99 lakh crore at the end of September from R68.26 lakh crore at the end of June. Although the fall is not too significant, the year-on-year increase was just about 9% in the September quarter, whereas the average for the past three years is way higher.
Indeed, it would appear that neither the government nor the private sector appears to be spending too much. While the government has moved ahead on some legislation including the land acquisition Bill and speeded up environmental clearances, the industry appears reluctant to add fresh capacity just yet, partly because of the slowdown in the economy and partly because interest rates remain elevated and are expected to start falling six months down the line.
?After nearly seven years of an increase in new investment proposals, the inventory of proposals under implementations has increased very significantly. As a result, the focus now shifts to completion of these projects and less on further announcements,? said CMIE MD Mahesh Vyas.
The slowdown in new projects has been reflecting in the weak output of the capital goods segment. July saw a sharp contraction in the output of capital goods growth to a negative 15.2% y-o-y, which resulted in industrial production growing at an anaemic 3.3% y-o-y in July ? way below the 8.8% y-o-y seen in June. However, economists have pointed out that capital goods data have been very volatile; in June, for instance, the sector grew 37.7% while in May, the increase was a mere 6.1%. Moreover, data for June was skewed by the big jump in electrical machinery which grew 89% and had it grown at the average of the last twelve months of around 2%, the IIP for June would have come in at just 4.8% and not 8.7%.
Engineering firms are expected to post lacklustre numbers for the September quarter. ?New orders are estimated to have come off by about 20% y-o-y during the September quarter and we expect managements to cut new order guidance,? says an analyst. Data collated by IDFC reveal that during July-September, engineering companies won orders worth Rs 34,260 crore with Larsen and Toubro and Bhel bagging some fairly large orders. The BSE capital goods index has lost about 20% since April, with at least three stocks having given up more than 25% over this time.