So far, data has suggested that all is not well with capital expenditure (capex) in the economy and investment demand has remained tepid. But could that be changing?
Also See | Optimistic Outlook (PDF)
KPMG’s Pulse survey for Spring 2011—a global business outlook survey for KPMG done by Markit Economics released recently—finds that in India, the percentage of respondents expecting a net increase in capex in manufacturing in the next 12 months has gone up sharply, from a net 32.4% in the Winter 2010 survey to a net 51.8%.
It’s intuitive that given the robust demand, companies will at some point start to increase capex, but what’s interesting is that the survey predicts it’s happening despite rising interest rates.
As Vetri Subramaniam, head of equities at Religare Asset Management Co. Ltd, says, “There’s no question that higher interest rates have been holding back capital expenditure by companies. The other factor is uncertainty. There has hardly been a more volatile time globally, with asset prices, oil prices, shifting monetary policy risks, natural disasters and geo-political risk all coming together. That is taking a toll on the real economy.”
Yet, the Pulse survey says, “A solid rise in capex is projected, with confidence increasing in February to a survey-record high.” The key to the change in outlook on capex could be the sharply higher outlook for output prices.
The net percentage of respondents expecting a change in output prices for manufacturing has gone up from 23.5% in the Winter 2010 survey to a net 42.3%. One reason for that is input prices, too, are expected to rise significantly.
But it does suggest that firms are seeing increasing pricing power. That’s also brought out by the increasing number of respondents who say their capacity utilization is going to be higher.
In its mid-quarter monetary policy review this month, the Reserve Bank of India (RBI), commenting on the acceleration in non-food manufacturing inflation, said: “The acceleration was spread across manufacturing activities, indicating that producers are able to pass on higher input prices to consumers.”
That’s an indication of strong demand, also brought out by the survey showing the sharpest increase in the new business since October 2007. And as Indranil Pan, chief economist at Kotak Mahindra Bank Ltd, points out, what matters for firms deciding on capex is ultimately the level of final demand.
Interestingly, the Pulse survey of the services sector shows that expectations of a rise in prices charged have also increased significantly, which means inflation in the services sector, not captured by the Wholesale Price Index, is likely to be high, too. The services sector survey also shows a similar sharp increase in expectations of capex.
The increased optimism in the survey contrasts with the toning down of growth estimates for FY12 by several brokerages and the prediction by the Organisation for Economic Co-operation and Development’s composite leading indicator that India is heading for a slowdown.
It also runs contrary to RBI’s objective of toning down growth to tame inflation. And if the survey’s forecast that capex is going to rise significantly is true, then that will add to the growth impetus, which has so far been heavily dependent on consumer demand.
This divergence is underlined by Ian Gomes, chairman of KPMG’s high-growth markets practice in the UK, when he says, “Indian business optimism is also interesting when you consider that its key stock market indices have been amongst the most poorly performing in Asia this year. It certainly isn’t dampening future enthusiasm though, with key survey indicators such as activity, revenues and capital expenditure registering two-year highs.”
Incidentally, while the services sector survey projects higher profits for companies, the manufacturing sector survey indicates a net 50% of those surveyed now expect higher profits compared with 53.3% in the Winter 2010 survey. That’s in spite of a rise in the number of companies predicting higher business revenue.
The spurt in input costs, in short, is likely to crimp profits, at least in manufacturing. That could be one reason for the inability of the markets to match the survey’s enthusiasm, although the recent bounce in equities may reflect some of its optimism.
Graphic by Ahmed Raza Khan/Mint
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