The slowdown faced by India Inc has now been reflected in the growth in capital expenditure (capex) on new projects and expansion or upgrading manufacturing facilities. The growth is only in single digit and it hit an eight-year low in 2011-12.
One big reason given for the single-digit growth of capex is Reliance Industries (RIL), which saw a reduction in net fixed assets by Rs 33,000 crore, mainly due to selling of Rs 24,000 crore worth of development rights. Nevertheless, even if we exclude RIL from the sample, the capex growth rate at 13.6 per cent also led to a slowing, compared to 17 per cent growth clocked by ex-RIL companies in 2010-11.
The data on net fixed assets (including capital work in progress) compiled by Capitaline-Plus revealed that 1,530 companies from the manufacturing and services sector had spent an additional Rs 1.24 lakh crore in 2011-12, up 9.6 per cent over the net fixed assets base of 2010-11. The slowest rate of growth was recorded in 2003-04, when India Inc had reported a five per cent rise in capex.
A Reliance spokesperson said “The fall is due to transfer of rights to BP (its new partner in oil and gas exploration) and also because RIL has not received necessary approvals from the government for developing the blocks, so we could not spend more on E&P (exploration and production).
Across sectors
But that is not all; the capex slowing has been across all large, mid and small size sectors, expect for a few such as steel, power and pharmaceuticals, which reported a strong double-digit growth. In the oil and gas sector, ONGC and Indian Oil added Rs 15,000 crore worth of net fixed assets but the growth was low due to a much higher fall in capex by RIL.
Over-capacity and falling demand restrained cement manufactures from putting in fresh money and, hence, the sector saw a single-digit growth in capex for the first time in six years. Subdued metal prices put a break on fresh expansion of non-ferrous companies, which have recorded a single-digit growth in capex for consecutive years. Fresh capex remained subdued in aviation, capital goods, construction, hotels and realty, due to high cost of borrowing and lack of order inflow.
Madan Sabnavis, chief economist with CARE Ratings, said “Capex has slowed in the last two years, primarily on account of two factors — low demand and high interest costs. Demand has come down due to lower consumption, which in turn can be attributed partly to high inflation, where a large section of household consumption has been directed to food items instead of consumer goods. Further, the government has gone slow on project expenditure to balance its budget. Further, slow reforms in mining and power have come in the way of fresh investment.”
The power sector has reported a strong 17 per cent growth in capex, mostly due to completion of new projects. However, the growth rate in 2011-12 has significantly fallen from 25 per cent in 2010-11.
Industry is not satisfied with the fact that the power sector did better than others. Even within the power equipment sector, transmission and distribution, which is three-fourth of the total equipment industry has grown much slower. Ramesh Chandak, president, Indian Electrical and Electronics Manufacturers Association, said, “The sluggish growth in the power sector is worrisome. If the sector continues to slow sown and generation targets are scaled down as feared, equipment makers will be at a huge loss, as they have invested huge money in capacities in past years but are now operating only at 65 per cent capacities.”
Reversal of the slowing in the capex cycle is crucial for reviving all economic woes. Sabnavis suggests reforms in critical infra areas should be introduced, the government should expedite incomplete projects and cut interest rates s in a calibrated manner.
Even RIL is planning huge investments. Its spokesperson said, “We were working on fresh investment proposals for our core businesses. We will be investing Rs 1,00,000 crore, of which Rs 60,000 will be in refining and petrochemicals. The remaining will be invested in our new businesses. This estimate does not include any investment in E&P, since we are awaiting approvals for these from the government and also clarity on pricing.”
According to data compiled from announcements by large companies, Reliance Communications has planned Rs 1,500 crore for FY13, to be funded through internal accruals. Bharti Airtel’s capex is expected to be $3-3.2 b in FY13, of which $1 bn is expected to be in Africa and $2-2.2 bn in India. Tata Steel targets a capex of $2.4-2.5 bn in FY 13. Tata Motors’ management estimates the FY13 at Jaguar Land Rover at £2 bn.
