A recent Reserve Bank of India (RBI) study echoes the market sentiment that a recovery in the capital expenditure cycle is imminent.

In 2014-15, fresh investments of at least 1.27 trillion are needed to equal the capital expenditure of the previous fiscal, which “seems to be attainable", RBI said in its September bulletin.

The optimism is also captured by a 51% rise in the BSE Capital Goods index in the current fiscal, about double that of the Sensex.

If that fresh investment indeed materializes, aggregate capital investment (new projects plus investment from projects started in previous years) will be 2.513 trillion for 2014-15.

However, as chart 1 shows, that is still some way away from the 3.4 trillion average capex in the five years to 2012-13.

But new investments have been slow to take off, which is why the overall investment number is falling. As chart 2 shows, new investments for the last three fiscals have fallen well short of what was needed to match the previous year’s number. In 2013-14, too, actual fresh investment was only 92,200 crore, compared with the 1.3 trillion required to stem a decline.

The caveat in this analysis is that we have numbers only for those companies and projects that have raised funds through banks, financial institutions, external commercial borrowings and local share sales. So, if a company has built a factory from its internal savings or through private debt placement, that won’t be reflected here. But note that another mode of financing—private placement of corporate debt—has been coming down. According to Prime Database, non-financial private sector firms raised 15,740 crore in the June quarter, down 14.3% from a year ago.

The second caveat is that these numbers are for envisaged investments, i.e., they are investment intentions based on financing details. Actual, or realized, investment could be very different.

The change in sentiment, however, is not matched by on-the-ground numbers. Order inflows continue to disappoint. For the top 7 capital goods makers, domestic order inflows declined 15% from a year ago in the June quarter, according to Kotak Institutional Equities. Thus, the 1.27 trillion fresh investment for this fiscal also seems a tall order.

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