According to CMIE data, new project announcements in the March 2012 quarter at Rs 2,50,000 crore are down 22% year-on-year, led by private companies (down a little over 50%) in electricity and construction sectors. While this was expected due to the slowing economy and higher interest rates, the scenario is better than the past, which has seen a 37% downside during the last four quarters for new project announcements.
Also, gross fixed capital formation growth, which indicates addition to fixed assets, excluding households sector, has come down from 17% in FY10 to 6% in nine months ended December 2011. This is a worrying factor as the current order book is good enough to create fixed assets till financial year 2014. Unless, order flow picks up and actual implementation starts, there will be little in terms of capacity addition post 2014.
What the report exemplifies is that order books of capital goods companies are expected to dry out by 2014. Growth in the economy will be on account of better capacity utilisation, rather than new capacity addition. The country can be further exposed to a period of jobless growth.
However, it is too early to have a party, feel CLSA analysts.
Say Mahesh Nandurkar and Bhavesh Pravin Shah, in their market strategy report dated April 9: “We would not conclude with this one data point that the improvement has started as there could be some data issues as well.”
Moreover, net new project announcements are flat sequentially at Rs 1,50,000 crore.
Unless deterrents like policy uncertainties, higher interest rates, Coal India’s inability to ramp-up domestic coal production and government’s huge borrowing programme remain, quick recovery in investment cycle appears unlikely and GDP growth beyond FY14 is questionable.
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While, this does not augur well for the industrial and capital goods sector in the long term, Nandurkar and Shah maintain their neutral view.