OPEN APP
Home >Economy > Investment mood weakens in Q1 as second wave interrupts recovery, shows capex data

The appetite for fresh investments got a fresh jolt in the June-ended quarter as the second covid-19 wave and subsequent statewide lockdowns sapped business confidence. New project investments were down 13%, falling back from the bump in the preceding quarter, latest numbers from the project-tracking database of the Centre for Monitoring Indian Economy (CMIE) shows.

Private and public sector companies announced new projects worth a combined 1.6 trillion in the June quarter. The impact of the second wave was far less pronounced than last year, when the sequential decline was 73%. The year-on-year increase in the June quarter was 44% due to the depressed base. The numbers are provisional and may be updated later.

By the March quarter, the investment sentiment had started improving, though project announcements were still subdued as compared to pre-pandemic levels. The June quarter numbers show the appetite to start new projects has suffered a blow again. However, the impact on private firms has been softer, as they announced projects worth 1.2 trillion in April-June, down 9% sequentially. In the public sector, new projects fell 26%.

Unsurprisingly, regional lockdowns dented state-level figures on new projects the most. While central government projects witnessed a 12% decline, state government projects had a 48% quarterly contraction. On a yearly basis, the value of these project announcements fell 40% and 47%, respectively.

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

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

Capex announcements in the real estate and services sectors contracted the most during the June quarter. Construction and real estate projects announced in the quarter were worth nearly 10,000 crore less, while the gap in the services capex was 21,297 crore.

Other sectors such as manufacturing fared well despite activity in the sector losing significant momentum in May and June. The latest purchasing managers’ index data for manufacturing shows a 10-month low reading of 50.8 in May, and even lower, at 48.1 in June. A reading below 50 denotes a contraction.

Manufacturing, as well as electricity, did well as these segments were allowed to function with limited activity: new projects rose 7.3% and 9.5%, respectively, compared with the March quarter. On a year-on-year basis, the jump was nearly five times in manufacturing. Capex announcements in the mining sector remained flat with a skimpy growth of 0.2% sequentially.

Project stalling rates, calculated as the value of stalled projects as a proportion of total projects under implementation, had been on a downward trajectory of late. However, in the June quarter, the stalling rate inched upwards for government projects as states resorted to localized lockdowns. Private sector stalling rates reduced over 100 basis points but remain at an uncomfortably high level, the latest data shows.

Lack of funds still remains the biggest reason for projects getting stalled. This factor had a share of 15%, while “other factors" contributed to 52% of stalled projects. The “other factors" category essentially takes into account unanticipated disruptions and natural calamities, and covid-19 disruptions might have contributed to this.

Most analysts believe the economic impact of the second covid-19 wave may not be felt beyond the June quarter. As the second wave subsides, states are cautiously easing restrictions. This has helped high-frequency indicators show improvement through the month of June. As a result, the appetite is largely expected to start picking up and investments could gather steam gradually.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our App Now!!

Close
×
Edit Profile
My ReadsRedeem a Gift CardLogout