A pick up in investment will have to come from an uptick in private consumption, which has been the mainstay in holding up aggregate demand
The cracks in the private investment cycle are likely to continue this fiscal as companies battle muted consumer demand, low commodity prices, sub-optimal capacity utilisation and high real rates for the leveraged corporate sector.
Private corporate sector investment, which peaked at 17.3% of GDP in FY08, has failed to pick up from the slump of FY13 as stalled projects mounted. There was hope that kick-starting stalled projects by providing required clearances would lead to some revival in private investment. While the NDA government took some steps to revive investments, the green shoots are yet to take root; most high-frequency data show volatile trends. Capacity utilisation in factories has remained in the range of 70-75% for the past two years, indicating excess capacity in the manufacturing sector.
In the three months to March, the stock of stalled investment projects touched 8.4% of GDP, marking the third consecutive quarter of rise, according to HSBC’s analysis of CMIE data. The value of stalled projects was $168 billion in this quarter as compared to $164 billion the previous quarter, and stalling of private sector projects increased the most in steel and power sectors.
But the ray of hope lies in the fact that stalled government projects have dipped and non-commodity-related investment projects show signs of stabilisation. Policy bottlenecks such as land acquisition, raw material supply and environment clearances are some of the main causes for stalling. Unfavourable market conditions, too, compounded the problem for private sector firms; there was a collapse in global commodity prices such as oil and steel. Policy-related issues will have to be resolved by the government at the earliest, taking into confidence the opposition parties on the floor of the house, like the way it did in the first half of the ongoing Budget session.
Public capex—accounting for 25% of overall investments—has held up better than private capex in the last 12 months. While the government has increased the pace of spending—aggregate capital expenditure of the Centre and states has gone up by 0.5 percentage points of GDP in H1-FY16, indicating a real expenditure growth of 25%—it cannot compensate private investment which accounted for 23% of GDP in FY15.
In FY17 Budget, the government increased allocation on infrastructure spending by 24% y-o-y both through Budget and off-Budget resources like market borrowing, which implies an increase of 0.3% of GDP in infrastructure spending.
Cost and time overruns and slower-than-expected economic growth made many capital-intensive projects financially unviable, and companies are reluctant to invest. Banks are no longer lending aggressively to large projects, especially in stressed capital-intensive sectors such as power, metals and mining, which account for more than 60% of the the overall corporate capex.
Debt in books of downgraded firms have peaked. Data from Crisil’s Ratings Round-Up show the debt of downgraded firms (excluding financial companies) has risen to an all-time high of R3.8 trillion, way above the R3.3 trillion seen in 2012-13, the previous peak. The report shows that the rate of downgrade accelerated to 8.6% for the 12 months ended March 31, 2016, from 6.9% in a similar time frame ended September 30, 2015. The upgrade rate of companies has fallen sharply to 11.1% from 13.2% during the same period. The decline in upgrade rate was due to delay in investment cycle and sluggishness in global demand. Most worrying was the fact that the median debt/Ebitda of downgraded firms was 4.6 times, or twice that of the upgraded ones and more than a third of the downgrades were to default category.
A pick up in investment will have to come from an uptick in private consumption, which has been the mainstay in holding up aggregate demand. Rural consumption has been weak because of two successive years of below normal monsoon. RBI, in its April monetary policy report, has underlined that a durable recovery in the capex cycle continues to remain elusive. “Profitability of the non-government non-financial companies has also moderated in Q3-FY16 … with implications for corporate saving and investment. These coincident indicators suggest that national accounts data for Q4-FY16, especially private final consumption expenditure, may be subject to downward revisions from the implicit levels in the advance estimates for the full year,” the report says.
The key to accelerate growth would be augmenting capital formation and productivity. Fast-tracking of stalled projects, shrinking overcapacity of factories and continued monetary transmission along with a favourable monsoon can boost the economy.