Just a few days after prime minister Narendra Modi exhorted captains of Indian industry to assume some more risk and go out and invest, an RBI study explains just how bad things are. Based on data on bank-lending as well as money raised from various sources such as IPOs/ECBs/FCCBs, the study points out that total capital expenditure by India Inc has fallen dramatically, from R3.4 lakh crore in FY09 to R1.9 lakh crore in FY15 and just a likely R0.8 lakh crore in FY16—based on current money raised, the number will more than halve in FY17, though there is still half the current year left in which more money can be raised for fresh projects. This is truly frightening since, as RBI points out, investment in new projects accounted for under 40% of the total spent in FY15 as compared to over 65% the previous year.
None of this, of course, should come as a surprise given the collapse in demand and, as a result of this, the sharp jump in unused capacity—so even when demand picks up over the next year or two, firms will be wary of adding capacity in most sectors. And if Chinese demand comes out even weaker than most are expecting right now, this is another reason not to invest—metals, where Chinese demand comprises the bulk of global demand, accounted for around 17% of bank-funded investments over the past two years. While the power sector accounted for over 42% of such investment in FY15, it is difficult to see how this can be sustained given how investors who have set up power plants are not getting paid on time by bankrupt state electricity boards and how they are being forced to operate their generating plants at quite low capacities due to this. In other words, the bulk of the demand drivers for investment are missing at the moment, though there will obviously be some respite due to the higher government spending in areas like roads and railways. While this means the government simply has to clear the bottlenecks in areas like the oil sector and needs to quickly fix the ailing power sector, what is even more worrying—and the RBI report does not cover that—is the collapse in investment by the unincorporated sector, what in GDP-parlance is called the ‘household’ sector. Between FY12 and FY14, investment here fell from 15% of GDP to a mere 10.6%—the fact that exports have slumped is a big reason for the collapse in investments here. In other words, getting the investment cycle back is going to take a long time.