PSUs' capex down 24% in 2014-15

Total capital expenditure by 36 listed public-sector firms fell from Rs 1.69 lakh cr in FY14 to Rs 1.29 lakh cr

Contrary to the belief that public-sector undertakings (PSUs) were stepping up investments, they actually cut back on their capital expenditure in 2014-15, shows a Business Standard analysis of capital expenditure (capex) by 36 listed PSUs in the past three years.

These companies' capex, after increasing 27.8 per cent from Rs 1.32 lakh crore in 2012-13 to Rs 1.69 lakh crore in 2013-14, declined 23.5 per cent to Rs 1.29 lakh crore in the year ended March 31, 2015.

These numbers suggest that the PSUs will have to increase their investments by 30.77 per cent in the current financial year to just reach the 2013-14 level.

With a collapse in private-sector investments over the past few years, the government had hoped to kick-start an investment cycle by getting cash-rich PSUs, sitting on an estimated cash reserve of Rs 2 lakh crore, to step up capital investments. That public spending would have to do the heavy lifting for reviving the economy had been articulated by Finance Minister Arun Jaitley in the Union Budget for 2015-16 and by Chief Economic Advisor Arvind Subramanian in his mid-year economic review. However, the capital expenditure figures of the PSUs underscore the difficulty the government is facing in reviving the investment cycle.

Within the sample of 36 companies, three sectors - power generation & distribution, refineries and crude oil & natural gas - together account for 87.6 per cent of total capital expenditure in 2014-15. These sectors in 2014-15 saw a sharp capital expenditure decline when compared with a year ago. The sharpest fall (50.4 per cent) was seen in the crude oil & natural gas sector, while the refineries segment declined nine per cent, and the power generation & distribution 7.4 per cent.

Dividends paid by these PSUs declined as well - from Rs 42,212 crore in 2013-14 to Rs 35,639 crore in 2014-15 - though the rate of decline here was lower than that in capital expenditure.

CARE Chief Economist Madan Sabnavis says: "There is a problem on the demand side. There is surplus capacity across industries. So, companies would rather invest their cash reserves in debt market securities than in fresh capacity. Also, given the problems in the power sector and the collapse in crude oil prices, it is unlikely the PSUs in these sectors will be cajoled into launching fresh investments."

Even if one discounts the crude oil & natural gas and refineries segments - investments in these might have been hit by an uncertainty in crude oil prices - capital expenditure by the remaining 30 companies fell from Rs 82,621 crore in 2013-14 to Rs 72, 549 crore in 2014-15. This suggests a broad-based investment decline. Public-sector banks have been excluded from the analysis, and the total capital expenditure in a financial year has been calculated by gross block in the financial year, plus capital work in progress, minus gross block in the previous financial year and capital work in progress.

"Not much is happening. The steel sector is in a bad shape. Barring the road sector, in particular the rural roads where some movement is seen, investments are not taking off," says Devendra Kumar Pant, chief economist, India Ratings & Research. The decline in public-sector investments should be seen in conjunction with a recent study on private-sector investments by the Reserve Bank of India (RBI). The study shows that a contraction in private-sector investments actually intensified in 2014-15. The capex during the year contracted 27 per cent from a year ago to Rs 1.5 lakh crore. In fact, 2014-15 was a fourth straight year of annual decline, with the pace of fall actually doubling during the year. In 2013-14, investments by the private sector had declined 13.2 per cent. But what is more worrying is the drying up of projects in 2015-16.

A broad-based revival in the near term seems unlikely. Non-food credit continues to remain sluggish. And worse, infrastructure credit growth has collapsed from roughly 35 per cent in 2010-12 to less than 15 per cent in 2013-14. Corporate results for the April-June quarter of this financial year were largely disappointing, with muted net profit growth. Larsen and Toubro, a bellwether for the larger infrastructure segment, saw a profit decline of 37 per cent. That underscores Sabnavis' argument that demand continues to remain anaemic and, with the RBI survey pointing to low capacity utilisation, fresh capacity additions seem unlikely in the absence of a significant demand push.

The Narendra Modi-led central government had pushed back the process of fiscal consolidation by a year, hoping that would give it enough space to push capital expenditure. But amid declining PSU and private-sector investments, the scale of a multiplier effect of this fiscal push for kick-starting an investment cycle seems debatable.