It has been clear for some time that investment demand has been falling. Macro indicators such as the Index of Industrial Production, dodgy though the data may be, have been pointing to a slowdown in investments.
In the first half of this fiscal year, capital goods production grew 4.6% from a year ago, sharply slower than the year-ago 16.4%.
The September quarter earnings of non-financial firms bear out the slowdown in investment demand at the level of individual firms. Fixed assets growth for the 42 non-financial firms in the Nifty index of the National Stock Exchange grew 10.3% from a year ago at the end of September. That compares with the 32.15% growth seen at the end of the first half of the last fiscal year. It is also lower than the 20.75% at the end of March.
The importance of capital investment can’t be overstated. Between fiscal 2006 and 2008, when India clocked 9%-plus economic expansion, investment demand contributed at least 50% to gross domestic product growth.
The overall mood is gloomy and earnings are coming down. But as Mint reported previously, Indian companies increased their fixed assets even through the slowdown. Although capacity utilization in the three months ended June has fallen from a three-year high in the March quarter, it was mainly due to seasonal factors, as the Reserve Bank of India pointed out in its latest quarterly macroeconomic review.
So what gives? Industry lobby Confederation of Indian Industry’s Ascon survey provides some answers to the steep decline in asset creation. A rise in the cost of capital due to monetary tightening, inadequate availability of raw materials, environmental clearances and land issue problems are some of the problems dogging capital expenditure.
Even in the times of the financial crisis, credit was relatively easy to raise (as systemic credit growth numbers in excess of 20% showed) and there were few problems regarding raw materials. As far as the other two issues are concerned, it comes down to everyone’s favourite bugbear—lack of government support.
The government has, however, made some noises recently about allowing foreign direct investment in retail and fast-track some infrastructure projects.
But as Morgan Stanley Research’s Chetan Ahya and Upasana Chachra point out: “Considering the developed world is facing major structural challenges, the support from global economy and capital markets (for reviving capex) may not be forthcoming. We believe that the government’s policy response will be critical to ensuring that the growth trend recovers over the next three-four quarters.”