India Inc will see a 25 per cent drop in planned capital expenditure (capex) over the next three years, according to a survey of 500 industrial projects covering 11 sectors conducted by domestic credit rating agency, Crisil. The lower figure, however, still represents an average compounded annual growth rate of 7 per cent.
The survey said companies will invest Rs 10.05 lakh crore in expansion in the next three years against announced capital spending plans of Rs 13 lakh crore. However, pent-up demand in some sectors and the fact that domestic banks will pick up the slack from reduced foreign investment will ensure that capex will continue to rise, despite slower economic growth.
| FEELING THE PINCH |
| Rs 13,00,000 crore Capex plan announced for investment till 2011-12 |
| Rs10,05,000 crore Estimate of investment to take place |
Manoj Mohta, head of Crisil research, said though investment in textiles, metal, autos and oil refining will be weak, investment in power was expected to rise 30 to 40 per cent over the next three years, and investment in gas transmission and distribution was expected to double. “This is a healthy sign for our economy,” he said.
Mohta added that the continuing supply deficit and increased government emphasis on augmenting power generation capacity would attract investment in the power sector. In telecom, factors attracting investor interest were the continuing buoyancy in mobile subscriber growth and the sheer size of the addressable market. In sectors facing over-capacity such as cement and automobiles, he expected investment flows to be subdued.
During past economic slowdowns in India — notably 1997-1998 and 2002-2003 — private sector investment contracted 1 to 2 per cent a year owing to cautious bank lending and weak demand, he said.
During the last four-year boom, however, Indian companies built up cash and today banks are willing to lend to high-demand sectors like power and telecommunications, both of which were rapidly expanding, Mohta said.
India long had an investment-to-GDP ratio of about 25 per cent, which shot up over the last four years to 39 per cent — close to that of China and Korea. In the last three fiscal years, corporate capital expenditure had grown 30 per cent on a compounded annual basis, Mohta said.
The Indian corporate debt market remains undeveloped, so that rise was powered by foreign investment, swelling company coffers and bank lending. Now, the global slowdown has reduced the amount of foreign funding available, and many Indian companies have also taken a hit on sales. As a result, banks will be even more important in funding growth, Mohta said.
“The global situation is not supporting that kind of investment. Indian corporations might also see a reduction in cash accruals. Their dependence on the banking sector will be significantly higher,” he added.
Corporate India isn’t surprised with Crisil’s estimate. B R Jaju, chief financial officer of capital goods producer Crompton Greaves, said the global market was still edgy and there would be a shortfall in investment to the extent that demand has come down.
He expected the rise in demand from other sectors to mitigate the impact on the capital goods industry.
Bankers said many companies had drawn up expansion plans and submitted investment proposals to banks to get credit when the economy and export markets were booming. Some of these projects may not now take off under the changed circumstances.
Also companies facing a slowdown or difficulties in raising equity could abandon projects or scale down credit requirements. Many projects for which credit lines were sanctioned may not get drawn fully, bankers said. They expected the overall demand for corporate credit to stay robust, however.
