The financial crisis has led to growth rates plummeting and a falling off of demand, resulting in excess capacity in many industries worldwide. In the circumstances, that should have led to a slump in capital expenditure. In fact, that’s precisely what happened during the last downturn.
The chart shows the percentage change in gross block every year since 1996 for all companies listed on the Bombay Stock Exchange. Indian companies had gone on a capital expansion binge in the mid-1990s, seen in the chart from the 22.15% rise in gross block in 1995-96. As first the Asian crisis and then the dotcom bust hit the economy, the rate of growth faltered and excess capacity was created in many industries, leading to a rash of bad loans for banks. As the chart shows, the rate of addition to gross block declined almost every year to a low of 6.74% in 2003-04. From 2004 onwards, however, there was a steady rise in capital expenditure, thanks to good economic growth and easier financing conditions. The growth rate fell a bit in 2007-08, but seems to have bounced back smartly in 2008-09.
We had pointed this out in an earlier column in August using a sample of 1,125 companies. The data for all listed companies confirms the trend. Clearly, the capex cycle has been far more muted this time, perhaps because government spending on infrastructure has supported growth during the downturn. Perhaps part of the growth in gross block in 2008-09 was because of past projects coming on stream, as shown by the slight decrease in the rate of growth of capital work-in-progress during the year. But that is unlikely to be a major factor. That’s because the recent numbers for the Index of Industrial Production also show a pick-up in capital goods, with the capital goods index going up by 12.8% in September.
Graphics: Ahmed Raza Khan / Mint
Growth in “machinery and equipment other than transport equipment” has been a relatively high 11% during April-September. That seems to indicate that investment demand is increasing once again. Indeed, many broking houses are forecasting a good year for the capital goods sector, as companies become more confident and start to expand capacity. As a matter of fact, the BSE Capital Goods index’s trailing price-earnings multiple is as high as 27.
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