An investment revival?
Business Standard, December 26, 2001
The government should help by adopting stable policies instead of talking vaguely
In the recent days there have been some signs, albeit few, of a revival in investment. Not surprisingly, given the severe slowdown in industry, this has created some optimism.
First, there is the good news on financial markets. Not only has the stock market picked up since September 21, at least 5 companies have plans to raise money through IPOs. It is reported that Bharati Televentures, Punjab National Bank, Eskay K’n’it, Future Software and Godrej Sara Lee have announced plans to raise money. After only three IPOs in the current fiscal, this indeed sounds encouraging.
Second, capital goods production, that was falling sharply in the first half of the year, has shown a smaller decline of 0.2 per cent over the last year in October. This has resulted in speculation that there may be some signs of the investment recession bottoming out in October.
Though the CMIE data for the category of capital goods available until September 2001 paints a bleak picture, with rates of growth being negative at over two-digit levels in the second quarter, there is still reason to be optimistic in other investment-related categories.
Production data (available until September 2001, in December 2001 issue of CMIE) suggests that the growth in the production of machinery and equipment in the period July-September was much better than the previous three months.
In the months of April, May and June, growth over the same months in the previous year was only 0.72 per cent, 2.58 per cent and -3.65 per cent respectively. In the following three months, it rose to 0.68 per cent, 4.20 per cent and 1.63 per cent respectively.
Production of transport equipment in the period July-September again performed much better than the previous three months. In April, May and June, growth over the corresponding months in the previous year was only 2.87 per cent, -0.21 per cent and 3.15 per cent respectively. In the following three months, it rose sharply to 3.59 per cent, 8.10 per cent and 5.27 per cent respectively.
The turnaround can be seen not just in production. Capital goods imports picked up sharply in August and September 2001. While in May and June, the growth rates of capital goods imports over the same months last year were negative at -5.28 per cent and -6.03 per cent respectively, they turned not just turned positive but were at double-digit figures of 11.56 per cent in July and 23.84 per cent in August.
Third, though sanctions by all-India financial institutions have been considerably lower than the last year, disbursements have not been that much lower. During April-August 2001, Rs 24,666 crore was disbursed by the all-India development banks, specialised financial institutions and investment institutions, compared to Rs 25,348 over the same period last year.
Though it is impossible to tell where this investment is supposed to be taking place, a recent paper by the RBI (in its monthly bulletin of November 2001) is indicative of the direction of investment. In an attempt at projecting corporate investment, the RBI has analysed corporate projects sanctioned by major financial institutions and public sector banks.
Of course, technically it is possible for companies to raise resources exclusively from capital markets to undertake large projects without seeking any assistance from term-lending institutions. But in a year when resources raised in capital markets have been very limited, it is meaningful to look at plans of private corporate entities that have approached financial institutions or banks. The phasing details of capital expenditure available in the relevant reports provide the basis of the likely capital expenditure.
The analysis suggests that the bulk of investment for 2000-01 was sanctioned for infrastructure projects. The share of infrastructure moved up from 43 per cent in 1999-2000 to 63 per cent in 2000-01.
Twenty power projects accounted for 31 per cent in 2000-01. The next was the share of roads, ports and storage at 22 per cent, followed by telecom projects at 10 per cent. The share of engineering industry in the aggregate cost of projects is 11 per cent this year, lower than 18 per cent last year. Chemicals continue to account for about 10 per cent of sanctions.
The three major industry groups, i.e. infrastructure, engineering and chemicals account for about 83 per cent of the total cost of projects this year. The share of industries such as textiles, fertilisers and pesticides, cement, electronics, hotels and restaurants and construction is between 1 per cent and 3 per cent.
The projection for the year as a whole indicates that aggregate capital expenditure would be of the magnitude of Rs 54,343 crore. However, the study cautions that realisation of the projected investment will be contingent on the strict adherence to the implementation of power projects as scheduled because their share in aggregate investment is substantial.
This is crucial to the investment projection. The RBI, in this projection, has had to take into account that at least 12 power projects that were sanctioned in 1994-95 and later, have already been cancelled. And, companies implementing five other power projects have approached the financial institutions again, with substantial revisions in the phasing of capital expenditure.
Clearly, the key to investment revival is investment in infrastructure as planned. These were stalled in the past and will be so in the future. As economists and industry have pointed out, ad nauseam, unless policies are stabilised and procedures simplified, private investors will continue to be discouraged to invest in the sector.
But the finance minister recently made a speech about increasing public investment, though most probably not many will view this as a serious policy announcement. The amount already planned for has not been spent, and budgeting for more makes little sense.
Also, the last time when Mr Sinha came up with a similar suggestion, it was shot down by most economists and he did not pursue the matter further. If he does pursue it this time and public investment is raised, given the government’s budget constraint, the increase cannot be much. That is why in the current policy regime any serious discussion about reviving investment must relate to private investment.
So, instead of making non-serious speeches about raising public investment, Mr Sinha would do well to address the issues relating to private investment in infrastructure. But, it is not that Mr Sinha does not have the benefit of good advice on this.
His chief economic advisor, Rakesh Mohan, has been reiterating this since he chaired the infrastructure committee report. While it was possible to ignore the warning when the economy was on an upswing, the finance minister can no longer afford not to heed the good advice anymore.