The investment cycle isn’t turning just yet with the private sector in no hurry to add capacity, data from Centre for Monitoring Indian Economy (CMIE) for the three months to June show. The value of new projects in Q1FY17 at an anaemic Rs 1.3 lakh crore was lower 60% sequentially, falling below the average of Rs 2 lakh crore recorded in FY16 and at a fourth of the average between FY06 and FY11.
Moreover, the value of stalled projects at Rs 11.2 lakh crore remained near an all-time high, with three-fourths of these promoted by the private sector. Projects have been stuck either because regulatory clearances haven’t come through or because inputs are in short supply.
Further, most promoters are also not able to cobble together the necessary funds to put up a venture and even those that can aren’t sure they want to add capacity at a time when the outlook for demand is hazy.
Loan growth in the last three months or so has remained subdued at around 9-10% year-on-year and bankers confirm there are few takers for project finance. Most high-frequency indicators suggest the economy remains sluggish. An index of eight core sectors that make up 38% of the Index of Industrial Production rose just 2.8% in May compared with 4.4% last year. Auto manufacturers clocked in smaller volumes of medium and heavy commercial vehicles in June, a fall of 4%.
“We believe that these are early signs of a slowdown and industry volumes could weaken significantly if replacement demand comes off, “Kotak Institutional equities commented in a note.
“Excess capacity and high leverage continue to weigh on private-sector business confidence,” economists at Standard Chartered Bank wrote in a note. They pointed out that increased public investment spending in FY16 and the budgeted spends for FY17 has so far failed to ‘crowd in’ private-sector investment. “We think a recovery in private-sector investment will take time, based on our analysis of past cycles, the current challenging environment and fiscal constraints on the government,” they observed.
According to an assessment by Icra, for the cement industry, the capacity utilisation is likely to remain moderate at 71% this year but it is expected to improve to 75% in FY2018, driven both by the pick-up in demand as well as
the slowdown in new capacity addition.
The economy is expected to gain momentum on the back of a good monsoon which could boost rural incomes. The pace of growth of real rural wages has been slowing over the past few months. “Rural demand should get a fillip if the sowing months of July-August see 100%+ of the normal rains that the Met has forecast,” economists at Bank of America Merrill Lynch (BofA-ML) believe. In urban India, consumption should get a boost from the increased salaries of central government employees. Overall, BofA-ML is pencilling in a consumption recovery of 1% of GDP in the second half of FY17 fuelled by lower interest rates, household savings coming from lower oil prices, a rise in support prices for wheat and the increase in salaries for government officials.
CMIE data showed the four-quarter moving average of projects under implementation fell to Rs 1 lakh crore in Q1FY17 (compared with Rs 1.3 lakh crore in FY16) with negligible contribution from the private sector.