Capex at 14-year low amid political uncertainty ahead of Lok Sabha polls

Capex on new projects have halved in the March quarter y-o-y, though stalling and completion rates are better than before

Capital expenditure (capex) on new projects halved in the March quarter of FY2018-19, compared to the same period last year even as a new government is set to be elected at the Centre.

The total value of new projects for the last quarter was Rs 1.99 trillion, a decline of 54.4 per cent from the Rs 4.36 trillion spent during the corresponding period in the previous financial year, shows data from Centre for Monitoring Indian Economy (CMIE). Experts suggest that companies may have put their investment plans on hold ahead of the Lok Sabha elections 2019.

“In the first half of 2019, we expect political uncertainty to compound negative effects and arrest private investment as businesses seek certainty before committing to new projects. The elections in April-May 2019 would be an important determinant of future growth and investment,” said an Asia Economic Outlook report from global financial services firm Nomura Securities on 10 December 2018.

The total number of new projects started during 2018-19 is Rs 9.47 trillion. This is lower than previous years, according to an earlier note from CMIE.

Vertical axis shows worth of projects in Rs trillion. Source: CMIE

“New investment proposals are expected to decline sharply during the year ended March 2019. We expect the year to end with new investment worth less than Rs 10 trillion. This would be much lower than the Rs 11.3 trillion worth of new investment proposals seen in 2017-18. It would also be the lowest since 2004-05, i.e. the lowest in 14 years,” said the 8th March note authored by CMIE managing director Mahesh Vyas.

The number of completed projects was up 11.3 per cent, at Rs 1.87 trillion, compared to the quarter ended March last year. The number of revived projects was down 59.3 per cent at Rs 0.11 trillion. Stalled projects saw a decline of 33.2 per cent to Rs 2.67 trillion.

Vertical axis shows worth of projects in Rs trillion. Source: CMIE

Meanwhile, around a quarter of companies’ existing capacity is lying unused, according to the Reserve Bank of India’s Order Books, Inventories and Capacity Utilisation Survey (OBICUS) for the July-September quarter of 2018-19. The survey appears with a lag but is a key indicator of capacity utilisation in the country.

“At the aggregate level, capacity utilisation (CU) rose to 74.8 per cent in Q2 of 2018-19, co-moving with the de-trended index of industrial production (IIP). Seasonally adjusted CU also increased by 0.4 percentage points to 75.3 per cent in Q2 of 2018-19,” the survey said.

Companies have limited incentive to invest when existing capacity is not fully utilised.

Vertical axis shows worth of projects in Rs trillion. Source: CMIE

Private investment has been going through a difficult time because of multiple reasons, including leverage and clearances, according to a Motilal Oswal Securities Capital Goods report.

“The decline in private capex can be attributed to weak end-market demand resulting in under-utilisation of capacity, high leverage with companies in sectors like steel, power, and infrastructure -- which constrains new borrowings and results in capex delays in land acquisition and clearances,” said the report dated 25 March 2019 authored by research analysts Nilesh Bhaiya and Amit Shah.

Voting in the Lok Sabha elections 2019 begins on April 11. Election results will be declared on 23 May. 

A fund manager who did not want to be named said: "There seems to be a disconnect between the stock market and the economy. Most companies we meet are unhappy with the below potential growth rate due to subdued demand. Spending on auto and consumer durables is under pressure due to tight liquidity and higher rates. They are not making any capex because they feel returns are not worth the efforts. The economy requires a significant boost for promoters to aggressively invest."