Hit by rising input costs, hardening interest costs and the policy conundrum, corporate capital expenditure would continue to be low in 2011-12. The low pace of capital expenditure would mean a moderation in credit demand from companies. It would also make the task of keeping economic growth between 7.5 per cent and 8.5 per cent difficult.
According to an analysis by BS Research Bureau, the slowdown in demand and the high costs of borrowing have applied the brakes on India Inc's expansion plans for a successive year, with an 11 per cent year-on-year rise in capital employed in the first quarter of this financial year.
Rupa Rege Nitsure, general manager and chief economist, Bank of Baroda, said confidence was shaken by factors like the flight of capital and currency depreciation. The sustained high input price inflation and sector-specific policy bottlenecks were the main reasons for the slowdown in capital expenditure, he said.
Capital expansion fell from 30 per cent in 2008-09 and 15.5 per cent in 2009-10 to 13.8 per cent in 2010-11. It rose 2.75 per cent in the quarter ended June, compared with 7.1 per cent in the quarter ended March, 3.3 per cent in the quarter ended December 2010 and 5.7 per cent in the quarter ended September 2010, according to BS Research Bureau data.
Pawan Agarwal, director (ratings), Crisil, said capital expenditure plans were intact, only implementation was delayed. He said there was uncertainty on land issues, fuel availability and environmental and statutory clearances, factors vital for infrastructure projects. Second, the cost of funds rose 200-250 basis points in the last 18 months, hitting viability and expectations of returns.
Corporate India is unlikely to raise capital spending substantially, expect analysts at Morgan Stanley Research. Their survey points to another year of tepid 10 per cent growth in spending. They also continue to rely on utilising profits, followed by bank credit as the major sources of funding. Manufacturing companies would likely continue to underperform in 2012, given the lack of private capex for the second successive year.
A Reserve Bank of India (RBI) study on capital expenditure plans of Indian companies said there were possibilities of softening in the industrial sector growth, owing to continued input price pressures and escalating capital costs. Capital expenditures in 2011-12 are likely to be lower than the previous year, the study said.
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It is not surprising then that few companies have announced capital expansion plans in the first five months of the current financial year. Syndicated loans aggregated $10.979 billion in the first eight months, accounting for 41 per cent of the $24.991-billion loans mobilised in 2010. Of the 300 applications received by RBI in the first four months of this financial year for foreign currency loans worth $9.062 billion, only 39 companies sought to mobilise $990 million for new projects.
However, an annual global investor conference organised by Motilal Oswal Securities suggested a strong appetite for growth after 2012. A survey by Morgan Stanley Research showed companies see downside risks to their already-low capex plans. Of the 325 companies with revenue of over $25 million each, 15 per cent are unlikely to see capex spending in 2011-12, compared with 11 per cent in 2010-11. Of the remainder, one third would retain their focus on productivity gains.