Thin investment pipeline may jeopardise growth

The softening investment demand and the decline in planned investments by companies may lead to shrinkage in the investment pipeline, which in turn, is likely to put growth prospects of 2012-13 at risk.

According to the Reserve Bank of India's (RBI) second quarter Macroeconomic and Monetary Developments review, loans sanctioned for projects by banks and financial institutions declined 43.76 per cent during the first quarter of 2011-12, indicating a decline in the demand for investment.

During the quarter, 135 projects were sanctioned loans worth Rs 80,300 crore, against a sanctioned amount of Rs 1,42,800 crore for 195 projects during the corresponding quarter last year, project finance data from 33 major banks/financial institutions showed.

“There is growing evidence of investment decelerating. Information from the corporate sector, the banking system's capex funding, housing transactions and the declining construction activity suggest investment has been adversely impacted. Planned fixed investment in new projects by companies declined significantly since the second half of 2010-11, and has remained low in the first quarter of 2011-12. Consequently, the investment pipeline is likely to shrink, putting 2012-13 growth at risk,” RBI said.

The central bank added the monetary tightening, hindrances to project execution, the deteriorating business confidence and the slowing global economy was the main reason behind the declining investment demand.

Private consumption, however robust, is also staring to show signs of softening, aided by moderation in the demand from interest rate-sensitive sectors, including consumer durables passenger cars. These factors are likely to neutralise the impact of improved agriculture performance on rural demand, RBI said.

Though the sales growth for the corporate sector continues to be healthy, profitability remains under pressure, owing to higher input costs. Going forward, both profitability, as well as the profit margins, of the corporate sector would continue to remain under pressure.

“A possible crowding out of private investment would pose stronger downside risks to growth. This can be addressed by rebalancing government spending from consumption to investment at this critical juncture, and by putting in place complementary policies to support investment,” RBI added.