No pickup in investments in short term as overcapacity kills need for expansion

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September 3, 2019 5:17 PM

Low capacity utilisation in most of the industries have left them with surplus capacity and this surplus has pulled down the need for any more expansion.

investment, rural economy, kotak, care ratings, capacity utilisation, over capacity, slowdown, slow economic growthFY20 may not see any major upward shift given the fairly low GDP growth witnessed in Q1 FY20. (Bloomberg image)

The ongoing economic slowdown that India is witnessing may be because of weak investment growth. Two catalysts of investment — demand and availability of funds — have witnessed weak growth in the preceding months. Low capacity utilisation in most of the industries have left them with surplus capacity and this surplus has pulled down the need for any more expansion, said a report by Care Ratings. Also, the problems in the financial sector involving NBFCs have affected the flow of funds and added to the worry. The report also underlines that FY20 may not see any major upward shift given the fairly low GDP growth witnessed in Q1 FY20.

Gross fixed capital formation (GFCF) rate, a measure of how much of GDP in a year has been accounted for by investment, has been rising very gradually from 28.2 per cent in FY17 to 28.6 per cent and 29.2 per cent in FY18 and FY19 respectively. However, it has declined for five successive years following FY12 when it was at 34.3%.

Investment in the corporate sector can be measured by the changes in gross fixed assets of companies. In FY19 for a set of 1405 companies, incremental GFA was Rs 4.84 lakh crore, out of which, only two companies accounted for 17.3 per cent of the total investments. The top ten companies had investments valued at 53 per cent of the total, which shows a very strong concentration in capital investment in the corporate sector.

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The pace of investment would also depend on how soon a healthy rural economy can be the starting point for consumption demand that will feedback to investment, said the Care Rating report. While rural consumption has been weak owing to near stagnant farm income growth, urban consumption has been under pressure owing to trough in the savings rate, worsening financing conditions and fading out of government salary adjustments,” going by the Kotak Economic Research. Investment growth remained sluggish at 4 per cent owing to election-related uncertainty and decline in the government’s capital expenditure.

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