Macro-economic forecasts and analysis
Real-time analysis of data releases and copious indicator data
The poor investments scenario during the recent three years worsened during 2017-18. Proposals for new investments fell sharply, abandoning of projects peaked and the momentum of completing projects seen till last year petered out. There are no signs of investments picking up anytime soon. There are no animal spirits. The private sector has retreated and the public sector is equally missing in action.
New investment proposals have been sliding since the quarter of December 2014 when they peaked at Rs.6 trillion. By the quarter of December 2017, they were down to Rs.1.2 trillion. That improved to Rs.2 trillion in the March 2018 quarter because of a seasonal pick up in the last quarter of the fiscal year. But, this is half the investment in the corresponding quarter a year ago.
New investment proposals during 2017-18, at Rs.6.9 trillion, are the lowest in the last 13 years. Inflation-adjusted, they are the lowest in 16 years.
We expect the estimate of new investment proposals in 2017-18 to be revised upwards in the coming months. Yet, it is unlikely that new investments would cross Rs.9 trillion. Even at this level, it would be the lowest in the last 13 years.
The fall in investment proposals is across ownership. Both, government and private sectors investments have declined. The absence of the government in reviving demand is conspicuous. In 2013-14, government did try and offset the fall in private sector’s investments. In 2014-15, it led the small recovery in new proposals. However, in the last three years, government investment proposals have fallen faster than private proposals. Between 2014-15 and 2017-18, government proposals fell from Rs.10.6 trillion to Rs.3.0 trillion - a fall of Rs.7.6 trillion. In comparison, the private sector’s fall is much lower of only Rs.4.2 trillion (from Rs.8.1 trillion to Rs.3.9 trillion).
Projects worth Rs.7.6 trillion were abandoned, shelved or stalled prematurely during 2017-18. This is a historical high. Never before have projects been abandoned or shelved at this scale. Most of this abandoning is of government infrastructure projects that could not make much progress beyond initial efforts. This is possibly a correction for over enthusiastic announcement of projects in the past. But, note that over 60 per cent of the investments abandoned in 2017-18 are of the government. In each case where the projects were finally abandoned, the government did try to revive the projects initially and then, they seem to have given up. Two such large projects are UPEIDA’s Rs.700 billion Ganga Expressway project and Nuclear Power Corporation’s Rs.600 billion Mithi Virdi Nuclear Power project in Gujarat.
Effectively, projects that were stalled have been finally abandoned. As a result, projects whose implementation is stalled have declined marginally - from Rs.11.8 trillion as of March 2017 to Rs.11.6 as of March 2018. But, new projects continue to get stalled. During 2017-18, implementation of an additional Rs.3 trillion worth of projects was stalled.
Abandoning or stalling of projects is a regular phenomenon. Entrepreneurs will propose projects enthusiastically in good times. In fact, the flow-and-ebb of entrepreneurs proposing new investment projects is a reflection of business cycles. We look forward to the flows - to the herd mentality of entrepreneurs during these times. During good times there will be an overstatement of intention. Correspondingly, in bad times these proposals will be whittled down. Like we look forward to the flows we should not be surprised with the reversals. Currently, we are in an ebbing phase. An increase in projects being shelved indefinitely or being abandoned altogether is normal.
During an ebbing phase, entrepreneurs also postpone completing projects on hand. This possibly explains the sharp fall in the value of projects completed during 2017-18. Projects worth Rs.4.2 trillion were completed during the year. According to the CapEx database, the expected completions during the year was of the order of Rs.11 trillion. Evidently, there has been a very substantial pull-back of completion.
We expect that with updations based on new information, the value of completions in 2017-18 will rise eventually to about Rs.5.5 trillion. This would still be only half the expectation before the year began. It would also be lower than the Rs.5.8 trillion worth of completions in 2016-17 and Rs.6.3 trillion in 2017-18.
The CapEx database shows that investments worth Rs.14 trillion would be completed during 2018-19. A substantial amount of this is a spillover of projects that were scheduled to be completed in 2017-18 or even earlier, but they were not completed. We believe that most of this Rs.14 trillion worth of investment will not be completed during the year. A cursory examination of the major projects that are due for completion in 2018-19 and using our judgement based on past behaviour, we believe that project completions are likely to be between Rs.6 trillion and Rs.7 trillion in 2018-19.