Corporate investment in new plant and equipment rose a massive 60.2% in FY07, says a study by the Reserve Bank of India titled “Corporate Investment: Growth in 2006-07 and Prospects for 2007-08”.
Total capital expenditure during FY07, not only from the projects started during the year but from the phased expenditure on projects started during earlier years, amounted to Rs1.6 trillion. That’s a huge improvement from the capex undertaken by India Inc. just three years earlier, in FY04, when the amount spent was Rs47,665 crore. Here’s another confirmation of the strength of investment demand.
If you include projects funded by external commercial borrowings and domestic equity issuance, the total capital expenditure intentions of companies last fiscal works out to Rs2 trillion. Even that is an understatement, because the amounts raised by American and global depositary receipts, private placements, and bond and debenture issues aren’t included in the report.
For the current year, the study estimates that expenditure on projects started in earlier years amounted to Rs1.4 trillion and capex on new projects in FY08 must be at least equal to Rs58,253 crore to equal last year’s level. Is that likely to be achieved?
The study believes so, arguing that, “Since business conditions remain conducive to support corporate investment demand at the back of generally sound corporate balance sheets with improved profitability and less unused capacities, such an amount of fresh investment in 2007-08 seems to be likely. In other words, the year 2007-08 may witness an increase in corporate investment when compared to that in 2006-07, albeit at a decelerated pace.”
Funds raised from the equity markets alone should be much more than in the previous year, provided of course, the bout of risk aversion declines.
Most of the investment is in power projects, followed by telecom. The number of projects, too, has increased, with 566 new projects started last year as against 393 in the previous year. In short, there’s plenty of visibility on the strength of corporate investment and it’s no wonder that capital goods stocks are seen as defensive stocks in these turbulent times.
China’s equity markets
Amid the global sell-off in equity markets, the Chinese A-share market, open only to domestic investors, has been marching to the tune of a different drummer. At a time when markets across the world have been tottering, the Shanghai’s SSE Composite Index has been reaching new highs. Since 26 July, when global markets started falling, the Shanghai index has gained 12%. It’s perhaps the only market completely insulated from the global contagion.
What’s the secret of its resilience? The Chinese market is a market that has been buoyed solely on the strength of domestic demand. Very low rates of interest on bank deposits have given local investors no option but to invest either in the real estate sector or in the stock market. Moreover, the Chinese stock market has been the star performer this year, with the CSI300 index, which tracks A shares listed in Shanghai and Shenzhen, up 142%. That fantastic performance has attracted a horde of would-be get-rich-quick punters and brokerage accounts are being opened at the rate of a million a week. Xinhua news agency reports that 100 million Chinese are now stock market investors.
Contrast the situation in the Indian markets, with investment in stocks and mutual funds accounting for only about 5% of household savings and with the stock markets dominated by foreign institutional investors.
Valuations in the Chinese market are extremely high and stocks could well be in a bubble of gigantic proportions. Also, since China is a non-market economy, the options open to the authorities there to manage the bubble may not be available in India. But there’s a crying need for more local money to flow into Indian stock markets to offset the clout of the FIIs. Setting aside a portion of pension and provident fund money for investment in index funds would go a long way in imparting stability to the market.
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