1. After moderate rains, investment climate should improve

After moderate rains, investment climate should improve

Now that the monsoon deficits are within the manageable limits, this should be the most appropriate time for the government to go ahead with all other pending reform measures.

By: | Published: September 24, 2015 12:07 AM

Now that the monsoon deficits are within the manageable limits, this should be the most appropriate time for the government to go ahead with all other pending reform measures. Although the inflationary expectations are on the wane, an immediate reduction in interest rate is not what RBI is sold to. The moot question is to what extent investment would get a boost with the reduction in rate. Is the business environment conducive to enhanced investment? An analysis done by RBI on private corporate sector investment of institutionally assisted projects may reveal some interesting aspects of the scenario.

The total investment actually done by 830 companies in FY15 amounting to R1495 bn is 28% lower than that in the previous year. However, investment intentions last year was at a higher level and due to uncertainty prevailing in some months of FY15 the initiation of new projects was at a slower pace and hopefully with passage of further reforms, the level of investment by the private corporate in FY 16 would be larger.

It is interesting to observe that metal industry accounted for 17.4% of the total investment, preceded only by the power sector at 42.1% and the investment in infrastructure sector as a whole comprised of 48.8% in last year which is nearly 9% more in FY14. This may be the direct offshoot of clearance of around 38% of the stalled projects. It is important to note that while transport equipment  and parts drew more than 5% of private corporate investment, which is substantially higher than the previous year, the same for electrical equipment sector dropped down.

Statewise, Odisha (metal), Maharashtra (metal, textile), Gujarat (textile) and Chhattisgarh (power) could receive principal shares of the investment.

In power, oil and gas and partly in metal sectors, the investment by the government and public utilities must precede private investment. This is where initiation of mega projects has the ability of changing the scenario to a favourable space for investment by the private entrepreneurs. The investment by World Bank and ADB in Dedicated Freight Corridors, irrigation projects and metro rail has already commenced, but the trickling-down impact on other related sectors in the supply chain need to come from the private sector. The envisaged rate of return could not be assured in some of the projects like in BOT projects in roadways. It is also important to note that Capex by PSUs in FY15 was nearly 24% lower compared to previous year. In this case also investment announcements by PSUs were at a higher level which would surely materialise in the current year.

The enabling factors for investment are gradually coming to light. Industrial production in July’15 at 4.2%  indicates that growth potential in industry is catching on and industrial stagnation would be a thing of the past.

Manufacturing sector has clocked a growth of 4.7% in the month which makes a cumulative growth of 4%  in the sector during the first 4 months of the current fiscal. Under the manufacturing sector, steel-intensive components like fabricated metal products, machinery and equipments, electrical machinery and apparatus, motor vehicles, other transport equipment and furniture manufacturing have observed a widely fluctuating growth rates between (-) 0.8 to as high as 38.4%.

However the slackness in demand continues to haunt the health of capital goods and consumer durable segments as they have grown by 4% and 5.8 % respectively in the first 4 months. The output in both these sectors has been adversely affected by cheaper imports of finished goods from China and other countries.

It appears from the industrial production and investment data and the steadfast pursuance by the government of further reforms in the economy, the business scenario is bound to improve in the coming months which would alone help the country to ride the chariot of Growth and Development.

The author is DG, Institute of Steel Growth and Development. The views expressed are personal

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