Worrying! Capital expenditure is falling; a lot depends on government spending and that could weaken too

By: | Published: October 16, 2018 12:55 AM

For investments to pick up, however, government policies need to be better framed; in the renewable energy sector, for instance, some state governments have reneged on contracts jeopardising the capex.

Capital expenditure is falling

It has been evident for more than three years now that investments are crawling because most companies in the private sector don’t have the financial wherewithal to set up fresh capacities. It is the government which is primarily driving capex. This trend has been buttressed by the latest data from the CMIE; the sequential fall in project announcements in the three months to September was a sharp 41%, led by a 64% drop in the private sector. What is also disconcerting is that fewer projects, on which work has begun, are being completed. One assumes these projects aren’t moving along either because clearances are not coming through or the funds needed to finish the project are insufficient. Here, too, it is more of the private sector projects that are stalled.

To be sure, Reliance Industries (RIL) has invested a very large sum—Rs 2.5 lakh crore—in its telecom enterprise. Moreover, business houses like the Tatas, Birlas, Vedanta and the JSW Steel Group have been buying stressed assets, whether they be steel or cement plants. One could argue, therefore, there is enough capacity that is in distress and waiting to be rescued—especially in the power sector. That is true and it is important these projects are salvaged and jobs are protected.

For investments to pick up, however, government policies need to be better framed; in the renewable energy sector, for instance, some state governments have reneged on contracts jeopardising the capex. Again, the brutal tariff war in telecom—encouraged by the government—has left several telcos severely short of cash flows while the lack of an attractive pricing policy in the oil and gas sector has stymied investments.

Indeed, given how most private sector players lack the capital to invest, the government must come up with polices that encourage entrepreneurs. Moreover, rules for foreign investment must be liberalised. The performance of the capital goods sector so far in 2018-19 reflects how poorly investments are faring. The sector reported only a 5% y-o-y rise in August, and while there was an unfavourable base effect, it was nonetheless a very modest show as it has been so far in 2018-19. It is not surprising, therefore, that the manufacturing sector, too, has not shown any big improvement.

Unless consumption holds up, the economy could slow down. The good news is that rural demand remains strong—this has been confirmed by car and tractor manufacturers. While the farm sector may be in trouble because prices of foodgrains have been weak, these, too, could recover on the back of a not-so-good harvest. Moreover, higher support prices may boost farm incomes if the government is able to increase procurement. Meanwhile, the non-farm sector is doing well. However, economists believe that government spends, which have been strong, could taper off. That, then, could see the economy slow.

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