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Opinion | Investment in the Indian economy is still in the doldrums

Even as election fever grips India, it is important to consider the key challenge that India continues to face. India’s growth story will be based critically on the revival of the investment cycle in a manner that generates productive employment. The latter can then form the basis of a virtuous growth story.

Envisaged Capex: Sources Side

A recent paper looks at investment intentions of the private corporate sector as gauged from the financiers’ side, or from the sources of funds. These include projects sanctioned/financed by the banking sector and financial institutions, as well as by private placement and external financing through External Commercial Borrowings (ECBs), Foreign Direct Investment. Estimates from the sources side indicate that the number of companies with investment intentions, together with the total size of the investment, has actually declined over the previous fiscal. Thus, 833 companies made investment plans during 2017-18 aggregating Rs 1,991 billion, as against 916 companies with investment intentions totalling Rs 2,028 billion in 2016-17.  In fact, the private sector’s capex plans have reduced continuously for the seventh year in a row.

Envisaged Capex: Demand Side

More importantly, one will need to juxtapose such envisaged capex with the intent from the demand side to understand the translation of ex-ante investment plans into realized investment. Business sentiments in the Indian manufacturing sector regarding the current situation as well as future expectations are tracked through two indices by the Reserve Bank of India, namely the Business Assessment Index (BAI) and the Business Expectations Index (BEI) respectively. These indices can range between 0 to 200, with values less than 100 indicating contraction and those above 100 indicating expansion.

While business sentiments assessed through responses of 1267 companies surveyed indicate expansion, with values of BAI and BEI both above 100, the current situation seems to have deteriorated. Between Q3 2017-18 and Q3 2018-19, the BAI actually declined from 109.8 to 107.1. The business expectations remained constant at 115.0 in the same period, before increasing marginally to 116.2 in Q4 2018-19.

However, the various indicators of business health from the viewpoint of industry/entrepreneurs indicated serious concerns in Q4 2018-19. A majority of the companies surveyed expected ‘no change’ in multiple business health indicators, including production, order books, capacity utilization, employment outlook, overall financial situation, cost of finance and raw materials, profits and the overall business situation. In the absence of expectations regarding improvements in these business indicators, it would be hardly surprising to find business, especially the small and medium sector, unwilling to invest in capacity.

Demand Conditions: Manufacturing Sector

 The manufacturing sector demand would have ramifications for investment outcomes in the country. A perusal of historical time series data from RBI’s Order Books, Inventories and Capacity Utilisation Survey (OBICUS) indicates that the position with regard to order books, inventories and capacity utilization have all deteriorated in recent years.

Thus, while capacity utilization in manufacturing has increased in Q2 2018-19, it was much lower (at 73.1) during the period Q1 2014-15 to Q2 2018-19 than the average figure (at 76.6) for the period Q1 2009-10 to Q4 2013-2014.  The average new order books increased only marginally over the same period from Rs 1.203 billion to Rs 1.233 billion. Average finished goods inventories increased by 72.3 percent, from Rs. 0.695 billion over 2009-2014 to Rs 1.198 billion over the period 2014-2018. Average Total Inventories (including Work-in-Progress and raw material inventories) also increased from Rs 2.042 billion to Rs 3.178 billion over the same period–a 55.6 per cent increase.

However, the average inventory/sales ratio declined from 55.2 percent to 45.9 percent, primarily due to a sudden spurt in average sales post demonetization, from Q4 2016-17 onwards to reach Rs 12.462 billion. This was compared to the average sales figure of Rs 2.822 billion in Q3 2016-17 just prior to demonetization. In fact, average sales over the period Q1 2014-15 to Q3 2016-17 was only Rs 4.9 billion. Understanding the factors responsible for such a sudden spurt in average sales may require deeper analysis.

As India gets ready to elect a new government, the mantra to initiating successful growth is an oft-repeated one- investments and more investments.  The incoming government will need to focus on business confidence and rev it up. The question to be asked of business, paraphrasing from a popular line in a recent blockbuster Bollywood movie, would be: “How’s the Josh?”


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