Capex jumps to 4.9% of GDP in December quarter

Driven by govt spending, investments hit six-quarter high in Sep-Dec, cheering industrials and infra firms

Since December 2010, fresh investments in new projects had fallen rapidly. Over three years, the number of stalled projects increased and the rate of project completion fell. At the end of December, shelved or stalled projects added to $38 billion. However, the tide seems to have turned in the last two quarters of 2013, as government spending saw a sharp rise.

According to the Centre for Monitoring Indian Economy, new investment projects have risen to 4.9 per cent of the gross domestic product (GDP) in the December quarter, from 3.6 per cent in the previous one. Nomura’s chief India economist, Sonal Varma, says on a four-quarter rolling sum basis, new investment projects stood at four per cent of GDP in the December quarter, down from 6.4 per cent a year ago. On a sequential basis, it has improved from 3.2 per cent in September.

However, this increase in investments has entirely been driven by the government, as private sector investments fell to 0.6 per cent of GDP in December, from 1.3 per cent in September. The increase in investments has been led primarily by two sectors, power and chemical products.

After peaking in 2007, new investments by the private sector have steadily fallen, due to slow approvals and low availability of raw materials. Private sector investments on a quarterly average have fallen to Rs 20,000 crore, from the Rs 1,50,000 crore seen in 2004. Despite this, economists are viewing the recent pick-up in government spending on capital expenditure as a positive sign, as it shows very early signs of stabilisation in the economy.

Goldman Sachs says the pick-up in investments in the December quarter is the highest in six quarters. In the December quarter, analysts say the government has announced projects worth Rs 71,000 crore, an increase of 73 per cent quarter-on-quarter and 89 per cent year-on-year. Goldman Sachs believes this suggests the end of a downward spiral in investments.

What does this mean for India Inc? Analysts believe the jump in government spending will be reflected in the coming earnings season (the third quarter), as order books and revenues will trend marginally upwards. Also, with the Cabinet Committee on Investment having cleared 31 per cent of the projects it had taken up, the execution of these will have a bearing on infrastructure and industrial goods companies.

The pick-up in investments is critical for infra players, as the sector saw a double-digit decline in order books in the December 2012 quarter. Analysts hope this decline will be arrested, as the government is investing. However, a pick-up in private sector investments is still a few quarters away.