Govt expects decline in investments to reverse in second half of FY17

The government’s statistics office expects the declining trend in investments to reverse in the second half of the current financial year despite demonetisation.

The gross fixed capital formation (GFCF) is now projected to expand by 4.2 per cent in October-March of 2016-17 after it contracted by 4.4 per cent over April-September. 

Advance gross domestic product (GDP) estimates, put out by the Central Statistics Office (CSO) on Friday, showed GFCF, which connotes investment, is likely to contract by 0.16 per cent for the whole of FY17. 

This raises the question as to whether the CSO has overestimated investment activity in the second half of the financial year – a period when economic activity was likely to be disrupted after demonetisation. 

GFCF has been contracting for the previous three quarters according to CSO data, with the pace of contraction actually increasing. In the fourth quarter of 2015-16 (January-March), it contracted 1.9 per cent, while in Q1 and Q2 of 2016-17, it declined 3.1 per cent and 5.6 per cent respectively. But, according to the Advance Estimates, GFCF is now expected to grow by 4.2 per cent over the third and fourth quarters. 

Economists are also sceptical of whether this sharp turnaround would materialise. 

“With a sharp revival in private investments unlikely in the ongoing quarter, the only way that GFCF growth can display a turnaround to this extent is if there is a huge increase in capital spending by both the central and several state governments in the second half of the year,” says Aditi Nayar, principal economist, Icra.

Other indicators, too, suggest that a revival in the investment cycle seems unlikely in the short term. 

Data on investment proposals from the Department of Industrial Policy and Promotion (DIPP) show that proposed investments (Industrial Entrepreneurs Memorandum) contracted by 40 per cent in November, when demonetisation was announced. 

CMIE data also show that new project announcements in the quarter ended December 2016, declined to a three-quarter low of Rs 1.25 lakh crore. Add to that the 12-month contraction in the capital goods segment in the index of industrial production and the situation is grim. 

On the issue of government spending, data from the Controller General of Accounts show that government capital expenditure on the Plan side actually contracted by 36 per cent and 71 per cent in October and November, respectively. Including non-Plan capex, overall capex still contracted by a staggering 165 per cent in October, though it grew at 11 per cent in November. Presumably, the contraction in October was on account of repayment of loans. 

At the end of November, total capex as a percentage of the budgeted amount stood at 57.6 per cent. This suggests that government spending could be ramped up in the last four months, though in absolute terms, the amount adds up to Rs 1.04 lakh crore.