India investment cycle on uptick, but these concerns keep private money at bay

By: | Published: March 7, 2019 6:48 PM

There have been several disruptions on the demand side in the past few years, which has hurt fresh investment. On the other hand, on the supply side, the NPA issue has also constrained fresh investment.

India has of late seen a slight revival in the investment cycle, but that is primarily driven by the increased government spending, and not so much by the private sector. There are also concerns such as a sharp rise in number of investment projects dropped midway, CARE Ratings said in a report.

There have been several disruptions on the demand side in the past few years, which has hurt fresh investment. On the other hand, on the supply side, the NPA issue has also constrained fresh investment.

Nevertheless, there is a hope of revival in investment, show certain indicators such as better gross fixed capital formation (GFCF) to GDP ratio; improved capacity utilisation; Industrial Entrepreneurs Memorandum (IEM); IIP index; and high extra commercial borrowings (EBC), CARE Ratings said in the report.

Upwardly mobile

The gross fixed capital formation as a percentage of GDP increased from 28.5 in Q2 FY19 to 29.3 in Q4 FY19, according to the CSO data. Also, capacity utilisation rates have stabilised at higher levels in FY19, after improving significantly in the first two quarters in the last year mainly due to destocking following GST. A pick up in capacity utilisation is a positive sign showing that there would be fresh investments in specific industries, said the report.

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Borrowings through the Extra Commercial Borrowings (ECB) route, which are normally directed at investment, increased to $26.38 billion in this fiscal year up to January 2019 compared with $20.69 billion during the same period of last year, the report said.

Concerns remain

However, the report has shown some concern citing Centre for Monitoring Indian Economy (CMIE) data which showed a sharper increase in the investment projects dropped midway. This more than offsets the marginal increase in the volume of new investment projects announced.

Moreover, the government has been the major driver of investments in India. The Union government has increased its capital expenditure to Rs 3.17 lakh crore in FY19 from Rs 2.63 lakh crore in FY18. Similarly, according to state budgets there has been an increase in capital expenditure to Rs 5.38 lakh crore in FY19 compared with Rs 4.71 lakh crore in FY18, by the states jointly.

Therefore, more needs to be done to improve private investment in the country which would be driven by factors such as capacity utilisation, bank lending, NPA resolution, interest rates etc, the report noted.

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