Mumbai: As auto makers including Maruti Suzuki India Ltd expand capacity to meet rising consumer demand, their investment is having a ripple effect down the entire supply chain.
For instance, JSW Steel Ltd is targeting a 41% increase in capacity to 11 million tonnes (mt) by 2011. The steel company wants to triple capacity to 32 mt in the next 10 years by building new factories in Jharkhand and West Bengal with a focus on specialized steel used to make automobiles.
It’s not auto makers alone. Across Indian industry, the drive for capacity expansion is fast gathering pace as the economy moves from recovery to rapid growth.
According to data from the Centre for Monitoring Indian Economy’s capex (capital expenditure) service, the industry is expected to commission fresh projects worth Rs6.5 trillion in 2010-11, the highest in a single year. That compares with Rs3.7 trillion of projects last year.
In April and May alone, some Rs1.7 trillion of projects were commissioned in the power sector and Rs60,000 crore in the steel sector, it said in its June economy review report.
“The domestic economy is in a better shape. Disposable personal incomes are rising and a genuine capex cycle is under way,” said Abhay Laijawala, head of research at Deutsche Equities India Pvt. Ltd.
Going by the estimate of the Reserve Bank of India (RBI), the Indian economy is expected to expand at least 8.5% this fiscal.
As RBI’s recent review of the economy puts it, “overall, private consumption and investment demand would be the two major drivers of growth during 2010-11. Production trends in capital goods point to continuation of the strong investment activities in the near-term.”
Between fiscal 2006 and 2008 when India clocked 9%-plus economic expansion, investment demand contributed at least 50% to gross domestic product growth.
That manufacturers are struggling to keep pace with consumer demand in products varying from fertilizers to automobiles is adding impetus to the capex push.
In a 29 July earnings call with analysts, Pawan Goenka, president (farm equipment and automotive), Mahindra and Mahindra Ltd, the nation’s largest utility vehicle maker, said sales in the June quarter would have been at least 7% higher but for the shortage of parts such as tyres, casting components and fuel injection parts.
In the industrial town of Manesar in Haryana, Maruti Suzuki India is expanding its annual capacity by 50% in the next two years to 1.5 million units a year.
RBI’s macroeconomic review, released a day before the Indian central bank raised its key policy rates to fight rising inflation in the economy, quoted a government report, which stated that capacity utilization levels in the fertilizer sector increased to 94.7% during April 2009-February from 83% in the year-ago period.
Similarly, steel makers are operating at 89.3% capacity utilization levels compared with 86% a year ago.
“Execution cycles have picked up in the private sector,” said R. Murali Krishnan, director-research at Ambit Capital Pvt. Ltd.
Apart from this, there are other indicators which point to the turning of the capex cycle.
For one, gross fixed capital formation, which measures the addition of new assets by households, companies and government, grew 17.7% in the March quarter over a year ago, the fastest in at least nine quarters.
“Recent data on credit growth and non-oil imports continue to point towards a strengthening investment cycle,” wrote Nomura Financial Advisory and Securities (India) Pvt. Ltd’s economist Sonal Varma in a 12 July note.
For the week ended 2 July, aggregate non-food credit grew 21.7%, up 8 percentage points from the beginning of the year, though this growth is partly explained by the increasing debt telecom firms have taken on to meet spectrum payments.
Also, capital goods production continues to be the fastest growing among the constituents of the Index of Industrial Production. In April, output from the sector grew some 70% and in May, although it moderated, production still grew 34.3%.
Shally Seth and Joel Rebello contributed to this story.