Investments likely to dip further, say economists

India Ratings and Research in its report said on the demand side, the GDP component that would be the worst hit is investment


Capital formation as a percentage of GDP deteriorated to 29% in the September quarter, 4 percentage points lower than the corresponding period last year. Photo: Ramesh Pathania/Mint
Capital formation as a percentage of GDP deteriorated to 29% in the September quarter, 4 percentage points lower than the corresponding period last year. Photo: Ramesh Pathania/Mint

New Delhi: After contracting sharply in the second quarter of 2016-17, investment could dip further on account of demonetisation, though rate cuts by the Reserve Bank of India could provide some respite. This will be mainly on account of the weak investments by the private sector, economists said.

India Ratings and Research in its report released on Thursday said on the demand side, the GDP component that would be the worst hit is investment. “Investment, particularly private investment, which is already down and out due to various reasons, will face the brunt of the de-legalization. We now expects gross fixed capital formation for FY17 to grow at 2.0%, down 306 basis points from our earlier projection,” it said.

Sunil Kumar Sinha, principal economist, India Ratings and Research, said, “Private investment is already down and out because of the slowdown in the economy over the past few years. Due to the stalled projects, a large number of private firms are facing debt overhang in the aftermath of a debt-fuelled investment boom and because most of the debt has been financed by commercial banks, particularly public sector banks that are now reeling under high non-performing assets. As a consequence, instead of expanding their balance sheet, both are in the process of repairing it, leading to a vicious cycle whereby banks are not lending and private sector is not investing. Also, several manufacturing sectors are struggling with excess capacity. Now, if we superimpose the demonetisation problem, the investment will be hit badly in the near future.”

The gross fixed capital formation, which is used as proxy for the investment demand, contracted 5.6% during this quarter, after declining 3.1% in the first quarter and 1.9% in the fourth quarter of 2015-16. The fall has been mainly on account of a sharp contraction of private investment as public investment has risen steadily.

Capital formation as a percentage of GDP also deteriorated to 29% in the September quarter, 4 percentage points lower than the corresponding period last year.

“The increase in stalled projects, weak capital goods output and subdued imports are reminiscent of the same,” said an Edelweiss report, also released on Thursday.

The government has put contraction in investment on its watchlist. “In terms of the challenging aspect of the data, investment is down substantially and that is something that needs to be watched,” said Arvind Subramanian, chief economic adviser in the finance ministry on Wednesday, reacting to the GDP data.

HSBC Global Research, in its report dated 30 November, said investment has been anaemic during this quarter. “Public investment had been very strong last year, holding up overall investment despite a contracting private sector. The performance this year is much worse,” it said.

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