Concerns on sluggish capital investment activity seem to be growing. According to IIFL Ltd’s economist Ashutosh Datar: “In the current fiscal, the investment cycle has not taken off as expected—be it in roads, railways or industry." A key indicator is the order inflows in engineering and capital goods sector, which analysts feel will be subdued for the September quarter. That too, after a weak June quarter for most companies, save for behemoths such as Bharat Heavy Electronics Ltd (Bhel) and Larsen and Toubro Ltd (L&T).

Also See The Capex Effect (Graphic)

Some of the macro indicators are not so robust. The latest year-on-year non-food credit numbers show that growth has been steadily slowing. But then one could perhaps question this as an indicator of capex, since this data does not take into account the funds raised by firms from outside the banking ambit. The macro data on fixed capital formation has also not been very strong. What could be the reason for the lacklustre capex? After the initial post-election euphoria on an infrastructure push, there has been a definite slowdown in orders tendered by the government. “We do not see any big-bang orders from bodies like Power Grid Corp. Ltd and NTPC Ltd," says an analyst with a Mumbai-based broking firm. Cut to the private sector and it is only the country’s consumption-driven firms like auto and auto parts, pharmaceuticals, fertilizers and white goods that are adding capacities. These do not make for headline capex as the investment outlay is rather low.

What would make for headlines is big-ticket investment activity in sectors such as ferrous and non-ferrous metals, oil and gas and infrastructure. But, barring power, orders in roads and railways are yet to take off. Analysts feel that in sectors such as steel and aluminium where imports are viable, firms are not confident of demand supporting aggressive expansion. Besides, with firms such as Sterlite Ltd hitting regulatory roadblocks, firms are cautious. Add to that higher interest rates.

So it’s not surprising that order inflows for engineering firms are low-key. That said, there is a divergent trend. The year-on-year growth rate for Bhel and L&T may be lower due their huge base of existing order book. But, analysts reckon that mid-cap firms such as ABB Ltd, Siemens Ltd and Crompton Greaves Ltd may not do very well during the September quarter.

The question is: If India’s economy is to grow at 8.5%, will investment activity catch up? Rapid economic growth has already led to a strain on existing infrastructure. Perhaps that’s why corporate managements still hope for big infrastructure spending by the government, looking for better capex in the December quarter. Perhaps the concern is best captured by the stock markets—the Capital Goods Index has underperformed the BSE Sensex over a one-year horizon.

Graphic by Naveen Kumar Saini/Mint

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