India investment to grow despite slowdown

India investment to grow despite slowdown

Mumbai: Capital expenditure will continue to rise in India despite slowing economic growth thanks to pent-up demand and banks picking up the slack from reduced foreign investment, according to a survey of 500 industrial projects.

In the next three years, Indian companies will pour Rs10.5 trillion ($215.25 billion) into industrial expansion, research and ratings agency Crisil said in the report covering 11 sectors of the economy released Thursday.

That’s down about 25% from announced capital spending plans, but still represents an average compound annual growth rate of 7% through the fiscal year ending March 2012, said Manoj Mohta, head of Crisil research.

Though investment in textiles and autos will be weak, investment in power is expected to rise 30 to 40% over the next three years, and investment in gas transmission and distribution is expected to double, he said.

“This is a healthy sign for our economy," he said.

During past economic slowdowns in India notably 1997-1998 and 2002-2003, private sector investment contracted by 1 to 2% a year due to cautious bank lending and weak demand, he said.

During the last four year boom, however, Indian companies built up cash and today banks remain willing to lend to high-demand sectors like power and telecommunications, both of which are rapidly expanding, Mohta said.

India long had an investment to GDP ratio of about 25%, which shot up over the last four years to 39% similar to that of China and Korea, Mohta said.

In the last three fiscal years, corporate capital expenditure has grown 30% on a compounded annual basis, Mohta said.

The Indian corporate debt market remains undeveloped, so that rise was powered by foreign investment, swelling company coffers and bank lending.

Now, the global slowdown has reduced the amount of foreign funding available, and many Indian companies have also taken a hit on sales. As a result, banks will be even more important in funding growth, Mohta said.

“The global situation is not supporting that kind of investment. Indian corporations might also see a reduction in cash accruals. Their dependence on the banking sector will be significantly higher," he said.