H1 Review of Investment - No sign of a let-up in startups
Dr. M.S. Kapadia

There have been upheavals in the global financial markets for past the two-three months, which has clouded the near-to-medium term outlook for the country. However, investment startups have maintained brisk pace and although project implementation seems to have slowed in recent months due to foggy perceptions, project mortality has not shown any abnormality. Here we take count of project investment in H1 of the current fiscal.

Fixed capital investment expanded 9 per cent in Q1, according to CSO's macro data, signifying a consistent decline from 16.7 per cent in Q2, 14.3 per cent in Q3 and 11.2 per cent in Q4 of the preceding fiscal. Similar data for the Q2 is not available.

Project announcements

The first six months of the current fiscal has seen record 7,068 proposals with total envisaged investment of Rs 5 trillion, indicating a more than twofold rise over project investment launched in this period a year ago, according to ProjectsToday. 

The manufacturing sector saw a major upswing with its share shooting up from 25 per cent to 32 per cent. Petroleum refineries, paper, cement, steel, machinery and automobiles were the star attractors. In another interesting development, private sector promoters have led in the investment binge. Nearly two-thirds of the new investment was launched by the entrepreneurs. Fresh investment launched through IEM, LOI and DIL also amassed Rs 5.86 trillion till August, according to SIA statistics, to be viewed against a record-high Rs 12.32 trillion outlay initiated during 2007-08. 

FDI

Foreign Direct Investment equity inflows in September were $2.56 billion, 2.6 times those a year ago. The FDI equity inflows during H1 of the current fiscal amounted to $17.21 billion, 1.4 times $7.25 billion in this period a year ago. Services sectors attracted $2.34 billion, construction activities including roads and highways $1.64 billion, housing and real estate $1.62 billion, and computer hardware and software $1.36 billion during the first five months of the current fiscal. 

Capital goods

The growth rate in capital goods dropped to 2.3 per cent in August; over a 31 per cent shoot-up a year ago (similar high base effect is in other segments of IIP also); but the cumulative increase also was half that a year ago. This would point towards a slowdown in actual project investment. Transport equipment and parts grew 13 per cent, machinery (other than transport equipment) 8.4 per cent and basic metal and alloy industries 6.4 per cent; but non-metallic mineral products stagnated at year-ago level. Finished steel (carbon) production increased by 3.9 per cent and cement 5.7 per cent. 

Import and export

Engineering goods export shot up 53 per cent to $7.4 billion during April-May, the latest period for which the relevant details are available. Machinery export climbed 70 per cent, while transport equipment export doubled. Machinery import also escalated 48 per cent to $6.6 billion over the period. Both electrical and non-electrical machinery shared this boom.

Bank credit flows

Bank credit escalated 10.4 per cent by October 10, twice the pace of 4.4 per cent in this period a year ago. Growth in housing and real estate loans decelerated to 13.9 per cent (16.6 per cent) and 46.3 per cent (52.9 per cent), respectively, but bank credit picked up sizeably in infrastructure (35.8 per cent), petroleum (91.8 per cent), basic metals and metal products (32.2 per cent), cement and cement products (62.8 per cent) and construction (48.3 per cent). 

Central government finance

The first batch of Supplementary Demands for Grants for 2008-09 authorising the government gross additional expenditure of Rs 2.37 trillion were introduced in the Lok Sabha on October 20. The additional disbursements include Rs 65,942 crore of oil bonds, Rs 38,863 crore for fertiliser subsidy, Rs 14,000 crore in fertiliser bonds, Rs 25,000 crore for farmers debt relief fund, Rs 10,500 crore for NREGS, and around Rs 29,000 crore for the implementation of Sixth Pay Commission recommendations. 

In the meantime, the Central government finances indicated a gross fiscal deficit (GFD) of Rs 1.03 trillion and revenue deficit of Rs 0.78 trillion in H1, showing an annual escalation of 26 per cent and 28 per cent, respectively. The last three months witnessed sharp worsening in these two indicators. Total expenditure was up 10 per cent and plan expenditure by a sharper 25 per cent. Overall, 45 per cent of the budgeted plan spend happened in H1. The ministries of rural development and urban development spent 70-79 per cent of annual allocation, but the ministry of power spent only 28 per cent and the department of atomic energy 35 per cent. The ministry of shipping, road transport and highways disbursed 46 per cent of the annual allowance. 

Project cost escalation

The ERIL Index of Cost of Project Inputs increased by 2.9 per cent as of October 18, against the current year's high of 3.4 per cent by September-end and 2.6 per cent a year ago. The WPI of machinery and machine tools escalated 5 per cent, though on a y-o-y basis; iron and steel subgroup showed 26 per cent rise in WPI. 

While pessimism seems to prevail in at least short-term outlook, the policy environment is investment supportive. The brisk tempo of project announcements, notwithstanding the uncertainties, gives us hope that the implementation pace would also improve once the country gets over the fallout and domestic finances and their costs get normalised. This is, of course, subject to a proviso that globally also the extreme negativity abates, thanks to massive government measures to revive consumer confidence and come out of the morass.

Published in November 10, 2008