Given the large quantum of stressed assets that have piled up and the very slight visibility on demand, it is not surprising industry hasn’t made large scale investments in the past few years. Much of the capacity creation has been the work of government agencies which have built or facilitated roads, power transmission networks, rural electrification projects, affordable housing, fibre optic connectivity and renewable power capacity. That is reflected in the acceleration in fixed investments post mid-2017; for about a year before that, they were decelerating.
Since the trend in the production of capital goods reversed between mid-2016 and mid-2017, when it registered double digit growth—compared with a contraction before that—there has been hope of a big revival investments. But the poor print in factory output suggests private sector players aren’t ready yet; over the four years starting 2014-15, IIP has grown 2.8%, 2.4%, 4.6% and 4.3%, respectively. The share of NSE 500 companies in the overall capex fell from 30.4% in 2009 to less than half that in 2012; in 2016 it was slightly better at 16.8%. If one excludes Reliance Industries (RIL), which has pumped in more than Rs 2 lakh crore into its telecom initiative, the share would have been lower. Government regulations—whether in telecom or oil & gas—have been a turn-off. One reason capex tapered off after 2011 is because oil and gas producers—who had driven investments for seven years—found the prices non-remunerative.
Even today, capacity utilisation is a relatively low 75%. Moreover, there is a whole lot of additional capacity to be found in the steel and power sectors in the form of stressed assets. When these assets can be snapped up at basement bargains there would be little reason for entrepreneurs to set up fresh capacity since there’s no indication demand is going to rebound sharply. The economy in 2017-18 will grow at just about 6.6%. Most companies, in any case, remain over-leveraged; many are trying to sell non-core businesses. Under the circumstances, it is hard to see where they are going to find the equity capital for the next round of investments. Hopefully, this time around, the banks will not contribute to the equity component of projects as they have often done in the past with promoters cleverly siphoning out their contribution by inflating project costs.
One big roadblock is the rising cost of bank loans; the yield on the benchmark hit 7.825% on Monday, the highest levels since February 2016. While assets will continue to be bought—and this too is, in some senses, investment and will ensure jobs are not lost—the quantum will not be enough to give the economy a big boost. Also, as economists point out, while consumption too drives the economy, the correlation between investments and GDP has traditionally been far higher.
This is not hard to believe—fresh investments would typically create many new jobs that drive spending. While government has been spending smartly in the last few years, the increase private final consumption expenditure (PFCE) has been tapering off—from 7.4% of GDP in 2015-2016, PFCE is expected to see a sharp deceleration in 2017-18 to 6.1%. The good news is in the loads of foreign capital coming in; most of this is in the services sector but nevertheless creates jobs.