RBI surveys hint at poor investment demand; business expectations plunge
If RBI's survey on capacity utilization is any indication, Indian manufacturing companies will be in no hurry to go in for capital expenditure
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If the Reserve Bank of India’s (RBI’s) survey on capacity utilization is any indication, Indian manufacturing companies will be in no hurry to go in for capital expenditure.
Capacity utilization in the January-March 2015 quarter is at a six-year low, compared with the same quarter in previous years (capacity utilization follows a seasonal pattern, moving up in the January-March quarter every year and falling sharply in the June-September quarter).
Not only was capacity utilization in the January-March 2015 quarter lower than a year ago, but what’s worse is that it was only slightly higher than where it was in January-March 2009, immediately after the Lehman bust (see chart). With so much excess capacity, why would companies want to expand, especially when so many of them are in bad shape financially?
That’s why there’s a clamour for the government to step in and stoke investment demand. The government is trying to do that—the central government’s capital expenditure (both plan and non-plan, those distinctions are pretty meaningless now) during April-June 2015 is up 17.6% from the same period last year. But last year was a year in which we had severe fiscal compression and very low government capex. If instead we compare government capex in the first three months of FY16 with that in the first three months of FY14, or two years ago, then the growth in capex comes down to 7.5%. That rate of growth over two years is not really something to celebrate. Nevertheless, the government is now trying to accelerate capital expenditure, especially on building roads.
But here’s the rub. The central government’s overall fiscal deficit during April-June this year is lower than in same period last year by 3.7%. So, while the emphasis on capex improves the so-called “quality" of government spending and no doubt has multiplier effects, the fact that fiscal deficit is much lower indicates that, overall, the government isn’t really adding a stimulus to the economy.
In the RBI’s latest industrial outlook survey, among lots of other things, they ask respondents whether capacity relative to demand in the next six months is adequate, more than adequate, or less than adequate. 92% of those surveyed said that, in the April-June 2015 quarter, their capacities were either adequate or more than adequate relative to demand in the next six months. There hasn’t been much of a change in that assessment over the past year. More significantly, the percentage of respondents saying they planned investment in fixed capital during the current fiscal year is the lowest since at least 2010-11.
But perhaps, the cruellest blow has been to business expectations. Investment depends to a great extent on business expectations. Buoyant animal spirits are essential for a revival of investment demand. But as the chart shows, the euphoria generated in business circles by the Narendra Modi government coming to power has fizzled out. The decline in the RBI’s Business Expectations Index captures the increasing disenchantment of business with the government, from whom they initially had high hopes. The Business Expectations Index is now not only lower than where it was a year ago, but it’s also lower than its level three years ago.
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