Low capacity utilization, high levels of leverage, and a clogged pipeline of stalled projects have fettered the animal spirits of Indian industry
New project announcements by Indian companies touched a 13-year low of Rs77,000 crore in the December quarter, the project-tracking database of the Centre for Monitoring Indian Economy (CMIE) shows.
The latest numbers suggest that the investment cycle in India is unlikely to witness a turnaround anytime soon. This means that it may take longer than expected for India’s growth engine to roar back to life. CMIE’s capital expenditure database is the most widely tracked one in India, and the data on new project announcements serves as a lead indicator for the economy.
The data shows that the value of new projects more than halved in the December quarter compared to the year-ago period. Compared to the preceding quarter, the three months ended December saw a 33% decline in the value of new project announcements. The last time project announcements reached such a low was in 2004.
The manufacturing sector has seen the sharpest fall in new project announcements. The only silver lining in the data was a sharp uptick in power projects, thanks largely to a Rs1,000 crore renewable power project in Andhra Pradesh and a Rs9,000 crore gas-based power project in Punjab.
Overall though, the investment picture remains bleak. There are three key reasons for the sluggish investment scenario. One reason is the low level of capacity utilization at existing plants. The last round of the Order Books, Inventories and Capacity Utilisation Survey (OBICUS) showed that capacity utilization had declined by more than three percentage points to 71.2% in the June quarter compared to the preceding quarter. The second reason for the lack of fresh investments was the pile-up of bad loans, which has made banks wary of lending, and has made companies cautious about new projects. The third and related reason is the rise in stalled projects, which has acted as a fetter on the animal spirits of Indian industry.
Indeed, the latest data from CMIE shows that the stalling rate for private sector projects has reached a record high at 24.7% in the December quarter. This beats the previous peak of 23.8% in December 2003.
The stalling rate is calculated as a percentage of the total projects under implementation so that the values are comparable across time. The stalling rates in government projects have seen a sharp improvement. But owing to the deterioration in the stalling rate of private sector projects, the overall stalling rate is hovering near a record-high at 13.2%.
The biggest reasons for stalling are lack of clearances (environmental clearances and others). The other key reasons are problems with fuel and raw materials, land acquisition problems, and lack of funds.
The manufacturing and power sectors are the worst affected by stalling. The power sector accounted for 40.6% of all stalled projects while manufacturing accounted for 28.4%of such projects.
Unless the pipeline of stalled projects gets cleared quickly and the debt resolution process moves faster, the capex cycle is unlikely to see a quick recovery.
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