Omicron overhang: New projects drop for second straight quarter

New projects fell 6.3 per cent in the December quarter compared with the September quarter. The value of new projects in the just-concluded quarter was Rs 2.1 trillion, according to the data from Centre for Monitoring Indian Economy (CMIE), which was lower than the Rs 2.2 trillion seen in the September quarter. It is, however, higher than Rs 1.5 trillion recorded for the quarter ended December 2020, the first year of the Covid-19 pandemic.
 
This data ties in with the November data for core sector growth, an index of eight core industries, which grew at its slowest pace since early 2021. It was up 3.1 per cent in November. Cement output contracted over the previous year. Other industries included in the index, such as coal, crude oil, natural gas, refinery products, fertilizers, steel, and electricity, recorded a slowdown barring fertilizers.  This is because rabi crop sowing was currently underway, said experts.
 
Meanwhile, the value of completed projects went up for the second quarter in a row to Rs 1.4 trillion from Rs 1.15 trillion. The pace going forward is likely to be closely watched amid rising cases of the Omicron variant of the coronavirus. Companies typically invest in creating new capacities when existing production capacity is anticipated to fall short.  Such investments had taken a back-seat amid falling demand because of the pandemic. The previous wave in the early part of 2020 had a marked effect on capacity utilisation.
 
“Due to the second wave of Covid-19 pandemic, several restrictions were imposed in many regions of the country, which adversely affected capacity utilisation (CU) in the Indian manufacturing sector; the impact was, however, less severe than that witnessed during Q1:2020-21 in the wake of lockdowns and other restrictions during the first wave,” said the Reserve Bank of India’s periodic Order Books, Inventories and Capacity Utilisation Survey (OBICUS) for the June 2021 quarter.

 
A national level lockdown had hit capacity utilisation during the June 2020 quarter.
 
“At the aggregate level, CU for the manufacturing sector declined to 60.0 per cent in Q1:2021-22 from 69.4 per cent recorded in the previous quarter; it stood at 47.3 per cent a year ago,” according to the RBI note.
 
Rating agency Icra’s chief economist Aditi Nayar had said that some sectors were seeing capacity expansion. The government’s production-linked incentive (PLI) schemes were also encouraging manufacturers. The PLI scheme provides incentives for companies on increase in sale of products manufactured in India.
 
“Capacity expansion is already taking place in some sectors such as cement and steel, and the PLI sectors, although the uncertainty generated by Omicron may temporarily delay some capex plans. In our view, rising consumption will push capacity utilisation above the crucial threshold of 75...(per cent)...by the end of 2022, which should then trigger a more broad-based pickup in private sector investment activity in 2023,” she said.
 
There is a case to be made for additional capacity addition in India given slower investments in previous years, according to Sorbh Gupta, Fund Manager- Equity, Quantum Mutual Fund. The current uncertainty may affect how this plays out. “Fresh capacity addition could get further delayed,” he said.