Abhijit Bhatlekar/Mint
Abhijit Bhatlekar/Mint

Stalled projects impact hopes of investment revival: report

As number of stalled projects is at near all-time high, investment cycle's revival may have to wait a bit more

Investments remained muted in the first quarter of financial year (FY) 2016-17 ended June and stalled projects were near an all-time high. Fiscal constraints, weak demand, and a leveraged private sector are said to impact the investment cycle adversely, according to a recent report on India by Standard Chartered.

Investment in projects under implementation (PUI) across sectors slowed during the quarter, said the report, Economic Alert, based on data from the Centre for Monitoring Indian Economy (CMIE). The value of stalled projects remained near an all-time high, even though the number of stalled projects did not increase during the quarter. Also, fewer new projects were announced; only one-fourth of the average rate during FY06-11.

Private investment remained muted despite interest rate cuts in the past 18 months, inflation and currency stability, and a significant improvement in the pace of project approvals. This indicates that headwinds such as excess capacity and high leverage continue to weigh on private-sector business confidence. Increased public investment spending in FY16 and FY17 (budgeted) has so far failed to ‘crowd in’ private sector.

The value of stalled projects remained high, at 11.2 trillion (FY16: 11.3 trillion), with 75% in the private sector. Lack of regulatory clearances and inadequate input availability explained the delays for 42% of stalled projects, while weak business sentiment (lack of investor interest, lack of funds, and unfavourable market conditions) accounted for 28%. Most of the stalled projects are in the electricity (31%) and steel (25%) sectors. Considering the current challenging environment, and fiscal constraints on the government, a recovery in private-sector investment would take more time.

Private sector distress

The four-quarter moving average of PUIs declined to 1 trillion in Q1-FY17 (1.3 trillion in FY16) as private-sector PUIs remained weak.

The central government was the sole driver of investment in this period, with a little contribution from state governments. The Centre accounted for about 90% of incremental PUIs in FY16, while state governments accounted for about 31%, as private investment fell.

While the stock of stalled government projects seems to have peaked at around 2.8 trillion in first half of FY16, stalled projects in the private sector continue to increase.

About 56% of total stalled projects are in the electricity and metals sectors. Regulatory clearance bottlenecks and input availability together accounted for 42% of delays in the private sector. Weak business sentiment explained 28% of the delays—up from 14% in FY12— indicating weak demand and excess capacity. A much lower proportion of projects are stalled due to land acquisition issues (10%), compared to FY12 (17%).

New investments fall

Newly announced investments totalled 1.3 trillion in first quarter of FY17, declining about 60% quarter-on-quarter. The FY16 average was 2 trillion and FY06-11 average was 4.5 trillion. The decline in the first quarter of FY17 would have been sharper had it not been for the announcement of a large steel plant (about 15% of the total value of announced investments during the quarter), although this was by a company recognised by Indian banks as stressed. There is a positive correlation between new project announcements and projects under implementation.

Edited excerpts from Standard Chartered report Economic Alert.

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