Capex of firms falling: RBI

Notes pressure due to rising costs, interest.

The rising costs of inputs and capital will have an adverse effect on the capital expenditure of companies in the current financial year, which is likely to be lower than in the previous year, according to a study by the Reserve Bank of India (RBI).

It says the capital expenditure of companies was Rs 382,461 crore in 2010-11, while they’ve planned capex of Rs 274,919 crore for 2011-12. “In all likelihood, capital expenditures in 2011-12 are likely to be lower than the previous year,” the study said.

With the central bank indicating that the country’s economic growth was likely to moderate to eight per cent in 2011-12, the report highlights the possibility of some softening in industrial sector growth due to continued input price pressure and escalating cost of capital. “The IIP (Index of Industrial Production, with base 2004-05) showed signs of deceleration in the first three months of 2011-12, more strongly in the capital goods sector. This raises some concerns regarding investment demand in 2011-12. Recent developments point to some negative sentiments in investment demand,” said the report.

Since March 2010, the central bank has raised policy rates 11 times to tackle inflation, which has stayed much above the central bank’s comfort zone. RBI is likely to raise rates further when it meets for the mid-quarter policy review on Friday. Most economists predict a 25-basis points rise.

While assessing the corporate investment scenario in 2010-11, the study pointed to deceleration in the corporate investment intention. “While sales growth of the non-financial corporate sector remained strong, they faced pressure due to high input prices and rising interest rates in 2010-11. Thus, profits grew at a lower rate and the margins contracted,” the report said.

The state-wise distribution of projects in 2010-11 shows Chhattisgarh the most preferred, with total proposed investment commitments reaching Rs 68,647 crore from 35 projects. Orissa, which attracted the highest investment last year, had a lower share in the total envisaged projects in 2010-11. According to the report, Andhra Pradesh, Gujarat, Karnataka, Uttar Pradesh, Chhattisgarh and Jharkhand remained preferred destinations for industrial projects, as reflected in the increasing share of project expenditure intentions in these states.