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Mahesh Vyas: Investment story's still alive

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Most have focused on the projects being shelved, but India’s juggernaut continues uninterrupted, says Mahesh Vyas

A number of commentators expect investments to slow down sharply in 2009-10. The IMF, in its report released on April 22, projects a steep fall in the growth of the — from 9 per cent in 2008 to 4.5 per cent in 2009. The slowdown “is primarily a result of weaker investment”, according to the Fund. Earlier, the World Bank, while commenting on South Asian countries said, “Capital flows have diminished, contributing to fall off in investment growth, notably in India.” And, the Asian Development Bank in its Asian Development Outlook 2009 had the following to say, “Substantial excess capacity in domestic industry and limited export demand are damping investment prospects.”

The RBI’s Annual Policy Statement 2009-10 released on April 21 states, “While domestic financing conditions have improved, external financing conditions are expected to remain tight. Private investment demand is, therefore, expected to remain subdued.”

The Business Confidence Index of the National Council of Applied Economic Research registered a sharp fall in January 2009 and the RBI’s Industrial Outlook Survey also reflected a fall in business expectations. These reflect a sentiment that fits well with the forecasts of the agencies predicting a slowdown in investments in 2009-10.

CMIE’s CapEx database provides a completely different picture of the trends in investments. The CapEx database tracks the announcement and implementation of individual investment projects till their completion or abandonment. It derives aggregates from these to draw inferences regarding trends in investments. The CapEx aggregates are thus based on direct observation of investment projects and are not derived from the usual macroeconomic accounting framework.

The CapEx database shows no signs of India Inc slowing the pace of announcing new investment projects or the pace at which they complete their projects. Save for a minor pause during October-December 2008, the investments’ juggernaut has continued uninterrupted. But, because of the global liquidity crisis and the domestic disruptions caused consequently, there is also an increase in the number of projects getting shelved. This increase in the shelving of projects is attracting the attention of the commentators. In the larger scheme of things, these shelving of projects are not significant.

In the second-half of 2008-09, projects involving investments worth Rs 1,19,205 crore were commissioned. This is larger than the Rs 90,686 crore worth of projects that got commissioned in the first half of the year. Record new capacities were created in 2008-09. At Rs 210,000 crore, these were higher than the Rs 182,000 crore and Rs 137,000 crore worth of investments commissioned in 2007-08 and 2006-07, respectively.

Investments have been on a roll recently. The CapEx database suggests that the momentum continues into 2009-10. Over a thousand projects, involving a total investment of Rs 490,000 crore, are scheduled to be commissioned in 2009-10. This is more than twice the project completions witnessed in 2008-09. Around 40 per cent of these investments are concentrated in just the top 40 projects. Twenty seven of these, that accounted for investments worth Rs 136,000 crore, confirmed to Centre for Monitoring Indian Economy (CMIE) in late March or early April, that their projects would get commissioned during 2009-10. Implementation of seven projects involving investments worth Rs 30,655 crore is already delayed and the projects will not get commissioned in 2009-10. Responses from the remaining six projects were not available.

The CapEx database provides project-by-project details of the implementation. Thus, the evidence of the investment boom continuing is very strong. The problem is that there is equally strong evidence of projects that were announced earlier being cancelled. Given the severity and pervasiveness of the global liquidity crisis, it was expected that entrepreneurs would be a lot more cautious in investing into new capacities, even in India. The CapEx database quantifies this caution.

Projects worth Rs 9,455 crore were shelved during the second half of 2008-09. During the quarter-ended March 2009, projects worth Rs 64,179 crore were shelved. This was more than twice the investments that got commissioned during the same quarter (Rs 31,966 crore). It is very likely that the information regarding delays will also be available with a lag. Companies did not immediately announce the shelving of projects after the global liquidity crisis struck in October 2008. They waited for a while before they were willing to admit publicly that their projects would have to be shelved.

It is also likely that the projects shelved could have reached higher levels than is reflected in the CapEx database. Often, the decision to shelve a project is never clear. It could be a temporary deferment till the times improve. Besides, it is easier to cancel a project that is in the nascent stages of implementation than it is to cancel a project that is at an advanced stage. Nearly 40 per cent of the projects that are scheduled to be commissioned in 2009-10 could not provide any information in recent months. These accounted for only 30 per cent of the total investments in value.

While a number of projects have been cancelled or deferred, implementation of investments of a much larger value is well on its way to completion in 2009-10. The global liquidity crisis was, in fact, a boon in disguise. The investment boom that was gathering momentum since 2004 was possibly getting a bit irrational, particularly in the real estate development sector. Thanks to the global liquidity crisis, this has been corrected. The remaining projects have been re-evaluated in the light of the difficult economic environment. The data shows that India Inc votes to continue to invest. India’s investment juggernaut therefore continues, having shed some of its less viable projects.

The CapEx database provides one more interesting metric of trends in investments. This is the announcement of new investment projects. These new intentions reflect the investment sentiment. A fall in new investment projects is the first sign of entrepreneurs becoming cautious. We had expected a fall in new announcements during the quarter ended March 2009. However, we are surprised by the record Rs 790,000 crore of new investment projects that were announced in the quarter.

The spike in new investments partly reflects an unusual rise in investment proposals from Gujarat because of the Vibrant Gujarat Investors Summit 2009. Announcements made at such political summits are often tentative intentions rather than clear proposals to invest. But, even if we exclude all the new investments announced in Gujarat during January to March 2009 (a sum of Rs 350,000 crore), the new investments during the period are impressively high. At Rs 430,000 crore, they are higher than the proposals made in the previous quarter and also in the same quarter a year ago.

Even after we net out Gujarat from the last quarter, new investments have continued to roll in at the rate of over Rs 400,000 crore per quarter and larger-than-ever investment projects are getting completed in the current year. Sure, companies did face greater difficulty in organising finances for investments, but that did not stop them from going ahead with their capex plans. Macroeconomists and the country’s statistical machinery need to take into consideration the evidence on capex seriously. I continue to believe that the economy is doing quite well. We just need to measure it correctly.

The author is Managing Director and CEO, CMIE mahesh@cmie.com  

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