Investment cycle set to last, but experts not betting on “big ticket” capex by corporates
Economists say investment cycle could last for about a year; would be led by public sector capex demand, while private sector still not ready for ‘big ticket’ investment due to lack of ‘credit trust’ in the system.
Most indicators of investment growth "gross fixed capital formation (GFCF), inventory stock, output, average sales, capacity utilisation, consumption demand, private and public capital expenditure, etc" are poised for a major lift but economists say its durability would be tested only in the coming quarters.
D K Srivastava, chief policy advisor, EY India, sees the current revival in investment cycle lasting for just three quarters or a year, post which he would reassess the situation.
“The investment will definitely pick up in the next three quarters, or maybe a year, as we near the elections. After that, we will have to reassess. Much will depend on global condition,” he said.
Another economist with leading management consultancy, who spoke off-the-record, expects both private and public investments to gain momentum as consumption demand moves up.
As it always does, she expects the uptick in investment to lag consumption demand growth.
“We are seeing consumption revival happening. This would mean that investment will also pick up, albeit with a lag. We have also been seeing under-capacity coming down. Once under-capacity is at an optimum level, investment will kick off,” said the economist, who did not want to be named.
According to her, 80% capacity utilisation is generally the optimal level in most cases for fresh capital expenditure (capex) to take off. However, each industry has a different optimal level of capacity utilisation.
And if you go by the optimal level, the recent average of capacity utilisation is close to a capex upturn, the economist added.
The latest data by the Reserve Bank of India (RBI) shows that the capacity utilisation at 75.2% in the March quarter last fiscal was the highest since 74.6% in the same quarter of FY16. The central bank’s statistics shows capacity utilisation has remained subdued since March quarter of fiscal 2016 after it slipped to 71.2% in the first quarter of last fiscal, 71.8% in the second quarter and 74.1% in the third quarter.
Another signal of investment turnaround --Index of Industrial Production (IIP) --has also been moving in a positive direction since the second quarter of last fiscal. It had fallen from 125.2 in the fourth quarter of FY17 to 121.1 in the first quarter of FY18, only to crawl back to 123 in the second quarter and then to 127.8 in the third quarter. It surged seven points to 134.2 in the fourth quarter of FY18.
Srivastava said this uptrend in quarterly IIP figures can be mostly attributed to the robust growth in the manufacturing and construction sectors. Consumption demand in commercial vehicles (CVs), fast moving consumer goods (FMCG), electronic goods and mobiles also spurred higher capacity utilisation.
The economist, who spoke anonymously, expects private investment uptick to be marginal and is not betting on “big ticket” capex by corporate houses yet. She blamed it on the lack of confidence among the bankers to lend to corporate borrowers.
According to her, there was also hesitancy on the part of companies to invest in long-term projects due to the current uncertain policy environment. “We believe that while some amount of investment will get generated, big-ticket investment from the private sector would still not be forthcoming. For that, the credit trust has to be built in the system. The banks are (still) wary of lending. The corporates are (also) hesitant to invest in long-term projects because policy might change,” she added.
EY’s Srivastava also sees investment demand being driven mostly by the public sector. He expects private investment to improve only marginally.
“Public sector (investment) will be direct capital expenditure on several government initiatives but private sector expenditure demand is also likely to pick up. The government is in a hurry to showcase that they have restarted capex. Stalled projects are first in line to restart,” he said.
Another tell-tale sign of a recovery in investment was the gross fixed capital formation (GFCF), which has made a U-turn since the second quarter of last fiscal.
In the annual report of last fiscal, the apex bank revealed that after scaling to a peak of 23.8% in the fourth quarter of 2009-10, GFCF had slackened to an average rate of 11.7% during 2005-06 to 2009-10 and to 7% during 2010-11 to 2017-18, “with some intervening quarters registering contraction”.
“Since Q2 2017-18 (second quarter of last fiscal), however, the growth of GFCF has picked up and sustained in Q3 and Q4 averaging 11.7%. This development warrants an empirical assessment of the factors influencing the investment climate,” the RBI stated in its annual report.
Even net sales growth number of non-finance listed companies for the second quarter of the current fiscal put out by the Centre for Monitoring Indian Economy (CMIE), is “impressive” at 19%.
But Mahesh Vyas, CMIE economist, in his article pointed out that the “acceleration was caused essentially by a sharp increase in commodity prices”.
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“But, high commodity prices are a double-edged sword. It can increase the sales of some companies, but by the same measure, it can increase the input cost of others,” he wrote.
75.2% capaciity utilisation in the March quarter of last fiscal
74.6% capacity utilisation in the March quarter of FY16
Rs 23,700 cr inventory additions by listed non-finance firms in Q2 FY19
In the same quarter, Vyas said the listed non-finance companies had added Rs 23,700 crore to their closing stock. The Rs 23,700 crore addition at the end of June 2018 is, therefore, quite high in comparison to the trends in the past five years,” added Vyas.
Source: DNA Money