Macro-economic forecasts and analysis
Real-time analysis of data releases and copious indicator data
The investment climate in India has been muted since 2010-11. According to the official national accounts statistics, the investment ratio dropped consistently from 34.3 per cent in 2011-12 to 28.5 per cent in 2017-18. According to CMIE’s CapEx database, new investment proposals dropped from over Rs.25 trillion in 2010-11 to less than Rs.9 trillion in 2017-18.
Factors that impact investments such as capacity utilisation do not show sufficient improvement. By the end of 2017 capacity utilisation was 74 per cent according to RBI’s OBICUS, which was an improvement from 71 per cent earlier. But, utilisation levels have remained in the band of 71-74 per cent band for long. The situation neither improves nor does it deteriorate any further. Ditto for plant load factor of thermal plants which hovers around 60-65 per cent.
The good part about these indicators is that currently they are all at the upper end of their usual ranges. This is a positive when seen along with the fact that new orders are picking up.
RBI’s measure of new orders at Rs.2.1 billion (for a sample of 118 companies) in December 2017 is at a recent high. It has been rising steadily lately. CMIE’s monitoring of new orders received by companies also shows a substantial pick-up in recent months. New orders received were at Rs.1.4 trillion in the December 2017 quarter, at Rs.1.7 trillion in the March 2018 quarter and Rs.1.2 trillion in the June 2018 quarter. The earlier quarterly average was well below Rs.1 trillion.
All of the above holds out a promise, albeit a weak one. Weak because we have been here too often in the past, only to be disappointed.
CMIE’s CapEx database does not show any pick-up in investments. In fact, a close examination of the numbers reveals a substantial slowing down of investments in the June 2018 quarter.
New investment proposals during the quarter ended June 2018 were worth Rs.2.1 trillion. This is 21 per cent lower than the Rs.2.6 trillion worth new proposals in the June 2017 quarter and 38 per cent lower than the Rs.3.1 trillion worth new proposals in the March 2018 quarter.
The June 2018 quarter new proposals value is influenced predominantly by two projects. Both these are projects by Jet Airways, each to buy 75 Boeing 737 Max aircraft. Total investment into these purchases is Rs.1.3 trillion. Many airlines have announced plans to increase their fleet. This reflects the sustained high demand for air-travel in India.
These two projects by Jet Airways accounted for two-thirds of the total new investments proposed during the June 2018 quarter. This implies that new investment announcements in the rest of the economy collapsed for all practical purposes.
Investment proposals excluding aircraft purchase was just Rs.769 billion in the quarter ended June 2018. This is the lowest level since June 2004, ie lowest in 14 years.
Proposals to set up electricity generation or distribution capacities have dropped sharply. Only 37 projects were proposed and the total investment envisaged in 28 of these for which cost information is available was Rs.304 billion. This is low. As new data flows in, it may rise a bit. Nevertheless, this low level of investments confirms the trend of low and falling new investments into the power sector. The average quarterly new investment into the power sector was between one and two trillion rupees till 2012. Post mid 2016, this average fell to less than half a trillion. Investments proposed in the June 2018 quarter are even lower.
A big disappointment in the June quarter’s estimates is the fall in the number of roadways projects. Only 44 projects were announced in this sector. Of this, cost was available for 22 which add up to an investment of Rs.60.7 billion. This is very low compared to an average new investment announcement of the order of Rs.480 billion per quarter (September 2014 quarter to March 2018 qtr).
While the sharp fall in investments in electricity is justified given the low plant load factor of existing power plants, the fall in new investment proposals in roads is not. We still need more roads. Implementation of road projects have accelerated. During 2016-17 and 2017-18, 22.6 kms of roads were built per day according to Ministry of Road Transport and Highways (MoRTH). This compares very well with 16.7 kms per day in 2015-16 and 12.1 kms per day in 2014-15. Apparently, the government’s focus has shifted to completing road projects rather than announcing new ones. This is evident from the fact that projects awarded slowed down to 8,088 kms in 2017-18 (till March 7 2018) compared to 15,948 kms in 2016-17 and 10,098 kms in 2015-16.
Whether for strategic reasons (like in roads) or for economic reasons (like in power), announcement of investments into creation of new capacities is weak. This could get worse during 2018-19. Business uncertainties associated with elections will peak during this year. Several resource-rich states like Chhattisgarh and Odisha will go to polls during the year. Elections in several other states are not too far either. Besides, elections to the Lok Sabha are also likely to happen within the next one year. Uncertainties regarding the outcome of these elections have increased recently and this, along with other reasons mentioned above, is likely to keep new investment projects on hold for some time.