The Indian growth story is not firing on all cylinders as capital spending - both in private and public sectors - is on a downward spiral. Investment projects announced by India Inc. in 2016/17 stood at Rs8.17 lakh crore, the third lowest since 2005/06. Project completion during the year grew a paltry 0.8 per cent to Rs5.74 lakh crore, compared to 17 per cent in 2014/15 and 42 per cent in 2015/16. Taken together, the capital expenditure (capex) data from the Centre for Monitoring Indian Economy (CMIE), gross fixed capital formation, or GFCF, details from the Central Statistics Office (CSO) and data from the Index of Industrial Production (IIP) also indicate a sharp slowdown in capex and asset formation.
Mahesh Vyas, Managing Director at CMIE, blames it on sluggish demand. "Capacity creation grew at a rapid pace till 2011/12 in anticipation of good growth in demand. However, demand has been lagging, and companies are now facing low capacity utilisation. As additional demand can be met through higher capacity utilisation, there is no need for them to create additional capacity," he says. After a steady decline for three consecutive quarters, capacity utilisation in the manufacturing sector stood at 72.7 per cent for the quarter ended December 2016. IIP data, a performance indicator across sectors, also show sluggish growth over the past 10 months. Also, Gross Value Added (GVA) in manufacturing sector stood at 7.9 per cent in 2016/17 compared to 10.81 per cent the previous year. Services also saw a dip in its growth from 9.7 per cent in 2015/16 to 7.74 per cent in 2016/17.
A decline in global and domestic demand hurt the private sector, which witnessed muted growth in new investment proposals of 4.3 per cent and 2.3 per cent in 2015/16 and 2016/17, respectively, a steep fall from 103 per cent in 2014/15. "Industrial volume growth and capacity utilisation have remained moderate, delaying the private sector's plans to add capacities," says Aditi Nayar, Principal Economist, ICRA, an investment information and credit rating agency. Things were even less rosy in the public sector, where new investment proposals halved compared to 2014/15, bringing down the total capital spending in 2016/17 to Rs 2.38 lakh crore.
"The relative stickiness of committed subsidy and welfare expenditure reduces the fiscal space for central and state governments to enhance productive capital spending. While pay revision, as well as crop loan waivers that some state governments may announce, would support urban and rural consumption, they would reduce the fiscal space available for infrastructure spending," explains Nayar. Moreover, recent government initiatives are mostly aimed at improving services and creating capacities.
Some data digging will further reveal how several core sectors, including manufacturing, mining, power, construction and real estate, have witnessed a contraction in new capex projects. The power sector was the worst hit with 43 per cent fewer project announcements during the year. Surprisingly, makers of construction materials, as well as metals and metal products, announced bigger capex plans, but these were not enough to boost investment activity in the manufacturing sector. The construction materials sub-sector announced projects worth Rs31,000 crore, a fourfold rise over 2015/16, while metals and metal products companies announced proposals worth Rs1.4 lakh crore, six times higher than the year before.
The services sector (other than financial services) also bucked the investment drought, announcing projects worth Rs3.64 lakh crore, as against Rs2.17 lakh crore in 2015/16. But past data reveal that the growth was mostly due to a low base in 2015/16, when new projects had dipped by 46 per cent from 2014/15 levels.
The diminishing appetite for capital expenditure has resulted in subdued growth in fixed assets. Take into consideration the GFCF, which is a component of the Expenditure method for calculating gross domestic product (GDP) and measures the net increase in fixed capital and hence, net investment. GFCF was 28.5 per cent of GDP in the March quarter of 2016/17, as against 30.8 per cent in the same quarter a year ago. A look at the past 12 quarter data also shows a declining trend.
Going by the CMIE data, net fixed assets of non-financial listed companies shrank by 9.2 per cent in September 2016. It was the first time that listed companies displayed such sharp shrinking of their asset base. Net fixed assets also fell by 5.1 per cent in March 2016. Incidentally, profit-and-loss statements of listed companies are available every quarter, but balance sheet data is available only twice a year - in March and September.
The problem stretches much beyond the fact that the country's organised sector has not been able to add to its capital assets, a key requirement for supporting growth initiatives and ensuring bullish economic growth. For instance, there has been a rise in the number of total outstanding investment projects. The number of projects under implementation are going up as well. But the gap between the value of projects under implementation and the value of total outstanding projects has been widening for a decade now.
A quick look at private equity (PE) deals also reveals sluggish trends. According to Grant Thornton, PE deals in the capital goods sector fell sharply from $456 million in the calendar year 2015 to $23 million in 2016. The announcement and implementation of the Goods and Services Tax (GST) impacted capital spending as well, especially as tax holidays for investing in underdeveloped or backward areas is no longer applicable under the new regime.
Commenting on the development, Vyas of CMIE says, "At a macro level, India Inc. will have to wait for the environment to change. However, individual companies will have to work around the problems of low demand and low capacity utilisation. Merely waiting for a turnaround is not a good strategy."
While the capex scenario in India looks gloomy, the silver lining is that projects worth Rs1.70 lakh crore were revived in 2016/17, and the sum invested in graveyard projects during the year stood at Rs3.37 lakh crore, the lowest since 2011/12.
Graveyard projects include initiatives that have been stalled, shelved or abandoned. The CMIE defines stalled projects as those that remain suspended due to regulatory hurdles or disputes or financial crunch. As soon as these hurdles are removed, the can be resumed. Aban-doned projects are those where promoters have backed off after starting work. The term 'shelved' is used when a project is withdrawn even before the work starts.
Although the number of stalled and abandoned projects has dipped considerably, the number of shelved projects has more than tripled, touching Rs92,000 crore in 2016/17. Projects worth Rs1.43 lakh crore were abandoned during the year, which was 28 per cent less than the year before, while Rs1.01 lakh crore worth of projects were stalled, 37 per cent less than in 2015/16. Most of the stalled projects are in Karnataka, followed by Uttar Pradesh and Andhra Pradesh.
"Due to weakness in balance sheets of the private sector, the onus of financing infrastructure is on the various government agencies, as has been evident in the last three years," says Nayar of ICRA. Weak demand and surplus capacity of close to 28 per cent have pushed down the capex growth so far.
The government, on its part, is trying to pull in investments. "Recently, the government of India gave permission to financially sound state government entities to avail of direct external assistance from bilateral agencies for implementing vital infrastructure projects (based on a guarantee extended by the state government and a counter guarantee by the GoI). It appears to be a prudent decision that would spur infrastructure activity in certain states," says Nayar.