Fresh investments surge - driven by two megaprojects

A surge in private sector investment has led to a revival in new project announcements in the December-ended quarter, fresh data from the project-tracking database of the Centre for Monitoring Indian Economy (CMIE) shows. But this recovery was driven almost entirely by two major project announcements, beyond which investment remains lacklustre.

Taken together, both private and public sector Indian companies announced new projects worth ₹4.3 trillion in the December quarter, a 37% increase compared to the year-ago period and a three-fold jump from the last quarter. Within this, private sector capex announcements rose by 60% to ₹3.6 trillion. In contrast, public sector capex fell by 25% in the same period. These numbers are provisional and may be revised later. The private sector upsurge, though, is not broad-based. Two projects alone shoulder 83% ( ₹3 trillion of the total capex value of ₹3.6 trillion) of the rise in private capex. One of the megaprojects is the expansion of the Jamnagar refinery worth ₹0.7 trillion, announced by Reliance Industries in November 2019. The other megaproject worth ₹2.3 trillion is Indigo’s aircraft acquisition announced in October 2019.

Without these megaprojects, the private capex figures would change significantly. Private sector announcements would stand at ₹0.6 trillion, a fall by 73% from last year and 9% from last quarter.

The Indigo project, which is classified under services, has anchored growth in the services sector. In the December-ended quarter, services capex announcements increased by six-fold from last year. Similarly, the Reliance project, which is classified as manufacturing, bolstered overall manufacturing sector investment. Manufacturing sector capex in the December-ended quarter more than doubled from the previous quarter but fell by 54% when compared with the same period last year. The power sector has also witnessed a consistent increase in the last three quarters and is up by 48% from the year-ago period.

Despite the new project announcements, stalled projects remain a major issue. Around ₹13.3 trillion worth of projects were stalled in the December-ended quarter, only a slight decline from the record-high value in the previous quarter.

The private sector stalling rate has stagnated at 28% in the last three quarters, the highest levels since CMIE started compiling data in 1995. Stalling rates of government projects has declined slightly but remains high. The stalling rate is calculated as a percentage of total projects under implementation so that the values are comparable across time. Within sectors, the manufacturing and power sector projects experienced stalling rates of 23% and 20% respectively. Along with the service sector, these three sectors account for 91% of all stalled projects.

Lack of funds continues to be a major hindrance for projects. In the December-ended quarter, about 16% of all projects were stalled due to the credit crunch which was worse than the previous quarter. The outlook for credit also shows little sign of improving. For instance, the Reserve Bank of India (RBI), in its latest report has projected a rise in Non-Performing Assets (NPAs), stemming from slippages and contractions in credit supply of the last quarter. Other major reasons for stalled projects include raw material supply problem and regulatory bottlenecks such as land acquisition delays and lack of clearances.

All this, combined with the broader economic slowdown, suggest that the spike in private capex may be temporary, skewed by the performance of two large companies, rather than a more permanent turnaround in investment. To revive investment, the government on Tuesday announced the implementation of ₹100 trillion worth of infrastructure projects. This could boost the capex cycle. And, as the budget approaches, all eyes will be on the government's other fiscal measures which will be critical in reviving capex and reigniting growth.