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Investment climate stayed weak in Dec quarter, latest capex data shows

Despite a gradual uptick in economic activity, investment conditions in India appear to have stayed muted in the just-ended December quarter. Photo: Priyanka Parashar/MintPremium
Despite a gradual uptick in economic activity, investment conditions in India appear to have stayed muted in the just-ended December quarter. Photo: Priyanka Parashar/Mint

  • New capex announcements were unimpressive during the Oct-Dec quarter, declining for the second quarter in a row. While the government did some heavy lifting, the private sector is still keeping their powder dry

Despite a gradual uptick in economic activity, investment conditions in India appear to have stayed muted in the just-ended December quarter. Private and public sector companies announced capital expenditure plans worth 2.1 trillion during the quarter, down 7% sequentially, shows fresh data from the project-tracking database of the Centre for Monitoring Indian Economy (CMIE). Project announcements had seen a drop of 18% in the previous quarter after a 17% jump in the June quarter.

The numbers are provisional and may be updated later.

The value of new project announcements in the latest quarter was 1.4 times the year-ago period when the country was recovering from the first string of lockdowns. The year 2021 ended with an average quarterly figure that was still almost half of the pre-pandemic levels of 2019. The looming risk of a third pandemic wave fuelled by the Omicron variant has again forced states to re-impose restrictions, which could dampen the sentiment further.

“Since the April-June quarter, the investment trend in new projects has shown a steady deceleration," M. Govinda Rao, chief economic adviser at Brickwork Ratings, said. “Again, the fear of the third wave threatens broad-based recovery and it remains to be seen how this will impact the manufacturing sector output and in particular, new investment."

There are some silver linings. The government’s capex spending plans looked positive as new project announcements rose 57% sequentially to 42,384 crore. This was a 36% jump on a year-on-year basis. Both central and state government projects jumped sequentially, by 68% and 17%, respectively.

“Having been conservative in the first two quarters, there have been attempts by both central and state governments to fast-track capital expenditures," Rao added.

However, three projects accounted for a bulk (66%) of the new central government capex announcements: a 2,000 megawatt (MW) floating solar power project by SJVN, a new crude oil pipeline system project from Mundra to Panipat by Indian Oil Corporation, and a Gorakhpur-Siliguri expressway project by the National Highways Authority of India.

On the other hand, as companies continue on a deleveraging spree, private sector firms are going slow on their capex intentions. New investment announcements in the private sector space declined 15% quarter-on-quarter (q-o-q). The year-on-year rise was 42%.

“Companies across sectors continue to deleverage, which in our view is laying the ground for an eventual capex recovery, although in the interim, it poses headwinds," said a Nirmal Bang report dated 29 November. “Meanwhile, the interest rate environment remains favourable for private capex."

There were some bright spots across industries. New investments in the manufacturing sector almost doubled during the quarter, and rose 74% y-o-y. Besides, the sentiment appeared more broad-based unlike the previous quarters, when only a handful managed a good show.

Investments in mining and electricity also managed to stay afloat during the December quarter, recording a q-o-q jump of 71% and 18%, respectively. Capex announcements in construction and real estate projects were down 60% while services saw a steep fall of 68%.

Project stalling rates, calculated as the value of stalled projects as a proportion of total projects under implementation, moderated by around 30 basis points during the December quarter. This was the slowest stalling rate in the past five quarters. Stalling rates for private projects declined by 3 percentage points to 22.9%, while public sector stalling rates inched upwards to 4.6%, the latest data shows.

Lack of funds remains the key reason for projects getting stalled. This factor contributed to the stalling of 14% of such projects and 17% in value terms, while “other factors" made up 53%. The “other factors" category essentially takes into account unanticipated disruptions and natural calamities, and covid-19 disruptions might have contributed to this.

While low capacity utilization and poor consumer demand continue to plague domestic investments, an uncertainty regarding the new covid-19 variant adds to the worry stepping into the new year. Though the steady pace of vaccinations may provide some comfort, the recent curbs could again make the investment climate unattractive for some time.

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