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MUMBAI : Sharp monetary tightening and an uncertain global environment took a toll on India Inc.’s capital expenditure plans in the June quarter. Government and private companies announced capex projects worth 3.6 trillion during the quarter, the first sequential hit in six quarters (40%), according to fresh data from the project-tracking database of the Centre for Monitoring Indian Economy (CMIE).

However, the momentum was strong from the year-ago period, with a 22% growth. The numbers are provisional and may be updated later.

With a gradual economic revival, new projects had seen a massive sequential jump of 67% in January-March 2022 but the recovery was shortlived. “Faster covid recovery had propelled optimism in economic growth and hinted at the revival of the momentum lost since 2018-19," said Raghvendra Nath, managing director, Ladderup Wealth Management Pvt. Ltd.

Facing headwinds
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Facing headwinds

“However, the cheer was squashed by serious socio-economic crises globally, such as soaring oil prices, continued supply chain disruptions largely because of China’s zero-covid policy and the Russia-Ukraine war. These situations have roiled global recovery and compelled hasty monetary tightening by central banks to tame uncontrollable inflation," he said.

This dealt a setback to government and private sector projects. For both the central and state government sectors, the sequential decline in capex announcements was more than 80%. However, among proposals by private sector entities, Indian investments improved from 2.6 trillion to 3 trillion. The segment even reported 44% growth on year. This included a pumped storage project for green power in Maharashtra worth 60,000 crore by Adani Green Energy and Acme Cleantech’s Mangaluru hydrogen and ammonia manufacturing plant project worth 52,000 crore.

Announcements in the private foreign segment fell around 82% after jumping nearly 14 times in the previous quarter. “In the past 8-10 months, the global scenario has changed dramatically and any new capex proposal will be taken with some scepticism," Nath said. “We expect the capex in India to continue to remain tepid."

The slowdown was broad-based across sectors, too. Project investments in manufacturing declined 36% to 1.3 trillion after growing 1.2 times in the March quarter. New investments in mining, services (other than financial) and electricity were down by 86%, 66% and 34% q-o-q, respectively.

Real estate bore the brunt of higher mortgage rates as new investments fell the most, 90% sequentially and 85% on year. A decline in urban real estate demand and weak rural demand have continued despite forecasts of a normal monsoon in 2022 and could be one of the key risks to the investment cycle, said an ICICI Securities report in June.

Project completion rates failed to pick up for the second quarter in a row. Completed projects were worth 29% less sequentially in Q1FY23 after a sharp drop of 55% in Q4 FY22. However, government and private projects showed contrary trends as government-owned projects declined 51% while private sector projects saw a 13% growth.

Elevated commodity prices and rising interest rates could be potential risks for capex revival in the near-to-medium term.

Project stalling rates, calculated as the value of stalled projects as a proportion of total projects under implementation, have been moderating over the past three quarters, and fell nearly 30 basis points in the June quarter. Stalling rates for private projects declined by 90 bps to 20.7%, while public sector stalling almost remained unchanged? at 4.3%.

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