India goes slow on capacity addition as rate hikes bite4 min read . Updated: 22 Sep 2011, 03:30 PM IST
India goes slow on capacity addition as rate hikes bite
India goes slow on capacity addition as rate hikes bite
New Delhi: Nirmal K. Minda, chairman and managing director of auto parts maker Minda Industries is back to the drawing board.
The 51-year old Minda, makes switches, panel controls and CNG and LPG kits for cars. Slowing vehicle sales have forced Minda, who counts Maruti Suzuki, Tata Motors, Ford Motor and General Motors, as his clients, to slash his Rs500 crore expansion plan by 40%.
“The main concern is not the increased cost of capital, but that higher interest rate is hurting consumer sentiment. And if they don’t buy cars, why will car companies buy components," said Minda, increasingly jittery about the impact that the Reserve Bank of India’s relentless rate hikes have had on consumer sentiment.
Minda is not alone. Companies across sectors are pushing back expansion as they issue profit warnings and push back new product launches.
High interest rates, coupled with hurdles in securing land and an increasingly weak global economic outlook have combined to hobble capacity expansion plans of Indian corporates.
To be fair, companies are mostly going ahead with purchase of capital equipment already ordered, but are circumspect on future plans, preferring to wait for policy reforms and a more benign interest rate regime.
India commissioned projects worth about Rs63,000 crore in the first quarter that began in April, a fraction of a target of Rs8.3 trillion for the fiscal year, due to project delays, the Centre for Monitoring Indian Economy (CMIE), a think-tank that tracks capex by Indian firms, said.
Slow creation of new capacities would hurt growth in power generation, steel and petroleum refining in 2011-12, it said -- sectors which are vital to India’s ambitious aim of maintaining 9% economic growth on a sustained basis.
A strong capex indicates investors’ confidence in the economy and that firms expect good return from their investments.
Investors remain bullish on the long-term prospects for the Indian economy, but have braced for lower growth in the near-term.
“Clearly, we do see many of our customers holding back in terms of new business," Bazmi Husain, managing director of India unit of power equipment maker ABB.
Consumer goods firm Dabur India has pushed back new product launches, while Marico has issued a profit warning.
Government policy makers expect the economy to still clock 8% in the current financial year, but analysts are more pessimistic with most estimates closer to 7.5%.
Expensive Debt, Unavailable Equity
The Reserve Bank of India is stuck between the need to tame inflation and an increasingly vocal government which is getting jittery about the economic slowdown.
The Reserve Bank has had its way so far. It has raised rates 12 times since March 2010 with the lending rate rising by a cumulative 350 basis points, earning it the moniker of being one of the most aggressive central banks of the world.
Companies are waiting for a definite signal from the central bank on an end to the interest rate trajectory before they commit on further expansion plans.
But the RBI feels that firms still have adequate pricing power inspite of moderating margins.
“Nobody wants to get into a capex programme without understanding where the funds are going to come from and at what cost it is coming," B. Hariharan, group finance director at paper-maker Ballarpur Industries, said.
India’s top realtor DLF, for which the borrowing cost has risen by 3-3.5% in a year, is no more borrowing fresh, group executive director Rajeev Talwar said.
Given the firms’ reluctance to launch new projects, lenders have cut their credit growth targets. India’s top lender State Bank of India has lowered its target for FY12 to 16-19% from 20-22% announced earlier this year.
“No new projects are coming up, new projects are almost on hold. Rupee loans offtake is low for term loans," said Pratip Chaudhuri, chairman at State Bank of India.
What has come as a double-whammy is the spectre of an economic recession in some advanced economies which has put stock markets in a tailspin.
Mumbai stocks are among the world’s worst performers this year, with the benchmark Sensex down about 17%. Foreign portfolio investors have bought a meagre net $607.4 million from Indian stocks in 2011, compared to a net fund inflow of $29.3 billion last year.
A volatile stock market has deterred many firms, including top public sector companies from launching public offerings.
Mumbai-based brokerage Elara Capital said that the capex slowdown began in July-September last year ever since an embattled government went into policy paralysis fighting corruption charges on key issues.
It adds that private investment demand has begun to shrink more recently.
Power-sector, labour, subsidy reforms, recapitalization of public-sector banks and administrative reforms of the bureaucracy are some of the pending reforms, according to Standard Chartered Bank.
“The inability to push ahead with these reforms has been a primary reason for the deterioration in the investment climate in recent quarters. Investment growth has declined steadily, and supply-side bottlenecks are emerging in several sectors," it said.
Delays in land acquisition, which has stalled several large projects including the proposed $12 billion steel plant by Korea’s Posco, shortage of fuel supply and delays in environmental clearance is making investments into power, fertilizer and steel uncertain.