A Mint analysis of 1,125 firms whose balance sheets have already been made public shows that growth in capital expenditure, or capex, remains very high in the current downturn. As the chart shows, growth in net block (net fixed assets) of these firms grew by 15.5% in 2008-09, slower than the previous year, when growth in net block of the same sample of firms was 20.4%, but still rather high. In contrast, growth in net block during the last downturn was far lower, touching a bottom of 3.6% in 2002-03. Clearly, this time firms have continued to go ahead with capital expenditure, despite the severity of the contraction.
What could explain this behaviour? One reason is that the downturn this time has been very sharp and while projects on the drawing board may have been shelved, those for which funds had already been tied up continued.?That’s seen from the big increase in capital work-in-progress. Indeed, if we add up the net block and?capital work-in-progress, as seen from the chart, the contrast between the present and the previous downturn is even more marked. The Reserve Bank of India, or RBI, data on capex on projects sanctioned by commercial banks and term-lending institutions also show a 25% jump in 2008-09. As Gaurav Kapur, senior economist with ABN Amro Bank, said, “This time, much of the expenditure is in power projects, (a sector) in which the downturn has had little effect.”
Yet another difference is that while the downturn in the early 2000s came in the wake of indiscriminate capital expenditure by firms in the mid-1990s, this time capex started after a long drought in capacity addition by firms that lasted till 2003-04. It’s interesting to note that the capex of at least Rs70,000 crore notched up on bank and term loan institution funded projects in 1996-97 and in 1997-98 was surpassed for the first time only in 2004-05, and that too in nominal terms.
Graphics: Ahmed Raza Khan / Mint
Because of inflation, the real value of the Rs78,608 crore worth of capex in 2004-05 would be much smaller than the Rs70,411 crore spent in 1996-97.
Does the buoyant growth in 2008-09 mean that we’re headed for a slowdown in capital expenditure? As mentioned earlier, capital work-in-progress is high. On the other hand, there is much more excess capacity in the world today and interest rates may soon turn up again. RBI, however, believes that capex in 2009-10 will be robust. In a recent study on corporate investment, it said, “Though uncertainty about demand would weigh on investment decisions, recent indications of improvements in business sentiments and corporate profitability do indicate that capital expenditure in 2009-10 can be maintained around last year’s level given the low leverage ratios of corporates in general and continued thrust on infrastructure, particularly on PPP (public-private partnership) projects by the government.” The market certainly seems to believe so, with the BSE Capital Goods Index trading at a price-earnings multiple of around 26.
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