New Delhi: High interest rates, a decline in demand and policy uncertainty have taken a toll on new investments, reports Sidhartha. Investments have plunged over 50% to Rs 32.5 lakh crore during April-June
2011 from Rs 71.4 lakh crore in the same period last year.
According to data accessed from the Centre for Monitoring Indian Economy, there has been a decline of over 19% even in terms of new projects announced. Investment drop may hurt growth, jobs Bloated Project Pipeline To Blame More Than Interest Rate Hikes, Global Worries Sidhartha TNN
New Delhi: According to data accessed from the Centre for Monitoring Indian Economy (CMIE), there has been a big fall in new projects being announced by companies. Compared to the 1,240 projects announced during April-June last year, this year the number is 1,003.
This is in sharp contrast to the government's estimates. The official GDP data released on Tuesday suggested that gross fixed capital formation (GFCF), the gauge for investment in the economy, was 7.9% higher at Rs 4.1 lakh crore during the first quarter of the current financial year. So, the impact of the increase in interest rates has only been less pronounced as GFCF went up 11.1% in April-June 2010. In fact, given the estimate of 0.4% rise in investment in January-March this year, the latest numbers released by the government actually point to a revival in investment.
The decline captured by CMIE is not confined to the manufacturing sector alone, even services have been affected. In fact, the decrease is higher in the case of the services sector, which does not include segments such as banking and insurance. Little or no growth in investment also does not augur well for future growth and employment generation.
"New investment proposals have risen relentlessly between 2004-05 and 2008-09. After about five years of this growth, the pipeline for the implementation and completion is quite bloated. The pressure to complete the projects on hand is so high that most manufacturers have a good reason to go slow on new announcements. Interest rate hikes and the adverse global scenario play only a marginal role in this," said CMIE managing director and CEO Mahesh Vyas.
In a large number of cases such as automobiles, companies announced expansion plans in late 2009 and 2010 as they were running out of capacity. While investment is in the pipeline, demand pressure has eased as several consumers have postponed purchase decisions due to higher interest rates and rise in costs. In addition, there are other industry segments which, at the overall level, have more capacity than demand. As a result, in case of cement, for instance, investment announcements declined 83% to Rs 30,000 crore this year from Rs 1.8 lakh crore in April-June 2010.
"On the ground, investment is not growing due to worsening of investment climate both as a result of slow policy action as well as high interest rates. First quarter data, however, shows that investment growth has not stalled as was indicated in the previous quarter when it was 0.4%," D K Joshi, chief economist at rating agency Crisil, said. "The inability to push ahead with these reforms has been the primary reason for the deterioration in the investment climate in recent quarters," said Samiran Chakraborty, head of regional research at Standard Chartered Bank.
As a result, sectors such as electricity have seen a sharp fall in investment announcements. Investment plans for the sector fell 48% to Rs 9 lakh crore during April-June this year from Rs 23 lakh crore in the corresponding period last year. For a powerstarved country, this is certainly bad news. In mining, which has been at the centre of the environment clearance controversy, the decline was 20.6% to Rs 48,550 crore, according to CMIE data.
The fourth quarter GDP data had suggested that investment in the economy was almost stagnant. In its annual report released last week, the RBI had noted that investment started slowing down in the second half of 2010-11 and "has shown no signs of improvement yet". CII director-general Chandrajit Banerjee said the RBI should refrain from raising interest rates further.
A decline in investment growth is showing in the emergence of supply-side bottlenecks in several sectors, said Standard Chartered Bank's Chakraborty. And, this will create further inflationary pressure, added Rajiv Kumar, secretary general of industry chamber Ficci. "Investment has taken a real knock. The interest rate hike won't help matters because capacity will not be on line and the fight against inflation will be hurt. A fall in investment is a real cause of concern because the growth seen in the last few years was due to private sector investment," he said.
The RBI believes that the current trend in investment is going to continue for a while as interest rates are likely to stay high. So, it would pay to ensure that projects in the pipeline do not fall off the list.
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