How covid's second wave pushed back investments

New project investments by companies in the June quarter fell 13% to ₹1.6 trillion from the preceding three months, the latest data from the project-tracking database of the Centre for Monitoring Indian Economy (CMIE) showed. Still, the impact of the second wave on investment decisions was much less pronounced than last year, when the sequential decline was a steeper 73%.

The latest numbers show companies’ eagerness to start new projects weakened again after improving in the preceding March quarter when the pandemic’s first wave appeared to be ebbing. However, the March quarter number was still much lower than levels prevailing before the outbreak of covid infections in India.

Government-run firms were more tight-fisted in the June quarter than their private-sector counterparts, who announced projects worth ₹1.2 trillion. Their investments, however, declined 9% from the preceding three months. In comparison, new investments announced by public sector firms fell a steeper 26%.

While central government projects witnessed a 12% decline, state government projects shrank 48% in the June quarter. Three projects accounted for 70% of fresh central government projects: a grid-connected solar power project by NTPC Ltd in Rajasthan, the integrated Barsua-Taldih-Kalta iron ore mine expansion project by Steel Authority of India, and the 11th tranche of a 1,200MW ISTS-connected wind power project by Solar Energy Corp. of India.

With capacity utilization in manufacturing still low and the second wave creating demand uncertainties, private sector investment is likely to remain subdued, said a 7 June Crisil note. That said, governments—largely the Centre—did the heavy lifting on the investment front after the pandemic situation improved last fiscal. This trend may continue this fiscal as well, the note added.

Capex announcements in real estate (down 77%) and services (62%) contracted the most during the June quarter. Manufacturing fared well (7% growth) despite purchasing managers’ index data showing significant loss of momentum. However, this was driven by two projects—Jamnagar Dhirubhai Ambani Green Energy Giga Complex by Reliance Industries and the Vandh and Tunda coal-to-PVC manufacturing plant project by Adani Enterprises—making up 78% of the value in the manufacturing sector. These two also made up 73% share in private sector projects.

Project stalling rates, calculated as the value of stalled projects as a proportion of total projects under implementation, were on a downward trajectory of late. But in the June quarter, the stalling rate inched upwards for government projects, as states resorted to localized lockdowns. Private sector stalling rates reduced by over one percentage point but still remains high. Lack of funds continues to be the main cause of projects getting stalled, with a 15% share in the list of reasons.

Most analysts believe the economic impact of the second wave may not be felt beyond the June quarter. As the second wave subsides, states are cautiously easing restrictions. This has helped high-frequency economic indicators show improvement through the month of June. As a result, the investment appetite of companies is largely expected to start picking up, and investments could gather steam gradually.