Fresh investments in India point to modest recovery

Indian companies announced new projects worth Rs1.95 trillion in the January to March quarter, up from Rs1.20 trillion in the previous quarter, according to data released by the project-tracking database of the Centre for Monitoring Indian Economy (CMIE). This was the first increase in new project announcements in four quarters, after having fallen to a 13-year low in the December quarter. Nevertheless, new project announcements in the March quarter were still less than half of what was witnessed in the corresponding period last year.

Manufacturing and power together accounted for more than half of all new project announcements. The biggest manufacturing project announced was by Reliance Jio, which intends to spend Rs15,000 crore to establish an electronics manufacturing park near Tirupati in Andhra Pradesh to make mobile phones and set-top boxes. Meanwhile, solar and wind power constituted almost the entire amount of new project announcements in the power sector.

Encouragingly, the rate of stalled projects also declined in the March quarter. However, the stalling rate of private sector projects still remains near a record-high. The stalling rate is calculated as a percentage of the total projects under implementation so that the values are comparable across time. As much as 11.4% of all projects under implementation remain stalled, while 24% of all private sector projects remain stalled.

The power and manufacturing sectors are the worst affected by stalling. The power sector accounted for 35.8% of all stalled projects while manufacturing accounted for 27.2% of such projects. The biggest reasons for stalling are problems with fuel and raw materials, land acquisition problems, lack of clearances and lack of funds.

Despite the recent uptick in new project announcements and a slight decline in stalled projects, it might be too early to expect a revival in India’s capital expenditure (capex) cycle. One important reason to temper down expectations is the declining asset turnover ratio of Indian firms. The asset turnover ratio —or the ability of firms to generate revenues from their fixed assets—has fallen to a 17-year low, a previous Plain Facts column had shown ( bit.ly/2Edty5n). Thus, a sustained recovery in private sector investments may not be on the horizon yet.

Low capacity utilization remains yet another hindrance to fast capex recovery. Data from the Reserve Bank of India’s (RBI’s) Order Books, Inventories and Capacity Utilisation Survey (OBICUS) showed that capacity utilization remained subdued at a lowly 71.8% in September 2017, much lower than 80% five years ago. The RBI’s survey covered 756 manufacturing firms in the September 2017 quarter. (bit.ly/2tClPhn)

Meanwhile, the pile-up of bad loans has made banks wary of lending, and has made companies cautious about new projects.

Thus, while March seems to have been a relatively good quarter for industrial projects, there remains a long road ahead for capex recovery.