Investments worth Rs 700,000 crore will get commissioned in 2010-11, 55 per cent more than those in the current year.
Scepticism regarding the capital expenditure (capex) boom is curiously enduring. In the end, the sceptics will be right because eventually the boom will stop. But, not yet. The capex boom is in full swing and will continue through 2010 and beyond. We will come to that later — after we have first addressed the issues that bother the sceptics.
Herd-mentality in investments will cause overcapacity
This argument is relevant for manufacturing industries, like steel and cement, where frenzied capacity-additions are feared to create excess capacities. Both these industries (and many others) have proven the sceptics wrong. Capacities have risen and so has production, but prices have remained stable, indicating a continued absorption of the increased output. In fact, in spite of nearly five years of capex boom, no industry faces excess capacity even today.
Land acquisition hurdles imply that some projects will remain only on paper
Land acquisition is contentious, and the legal framework for dealing with land acquisition (particularly by the state) needs an overhaul. Many projects have been challenged or abandoned because of the unwillingness of landowners to part with their land. There is no denying that in the long run, the single-largest challenge to the continuation of the current capex boom is acquisition of land. But, it would be defeatist to assume that the problem will not be resolved.
More importantly, an impressively large number of projects have moved from paper drawings to bustling (and polluting) industries in spite of the land acquisition problems. Even after five years of boom period and a confidence-shattering 2008-09, the investment proposals that reached completion grew handsomely in 2009-10. The year 2009-10 did not see a slowdown in investments, and land acquisition problems are unlikely to cause a slowdown in investments in 2010-11.
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According to CMIE’s CapEx database, a record Rs 450,000 crore worth of investments will get commissioned in 2009-10. This will be a good 60 per cent higher than the commissionings recorded in 2008-09. We have discussed this trend and the expectation for the current year earlier in these columns. As over half the year has passed, there is greater confidence that in 2009-10, record additional capacities will be created.
We have crunched the CapEx database further to see what lies ahead, in 2010-11. The CapEx database provides sufficient information for us to make projections further into the future, but such forecasts entail greater uncertainties arising from implementation delays or sometimes acceleration; some cancellations and some additions to the list of projects under implementation. The CapEx database identifies 1,633 projects that are scheduled to be completed in 2010-11. And, these entail an investment of a whopping Rs 870,000 crore. However, CMIE analysts are sceptical about these projects being commissioned during the year. Similarly, they are sceptical about the over Rs 500,000 crore worth of projects that are scheduled to be completed in the current year. Analysts at CMIE regularly discount claims that promoters make by tracking the progress in implementation and by using some historical insights.
Thus, while the CapEx database reports the commissioning of Rs 870,000 crore of investments in 2010-11, CMIE analysts believe that the actual commissioning could be close to Rs 700,000 crore. This includes the spillovers from 2009-10 as well. Thus, the analysts’ discounting is well over 20 per cent of the stated investments.
None of these 1,500-odd projects face any problem related to land acquisition that can jeopardise completion of these projects in 2010-11. Most of the projects (over 50 per cent by the value of investments) are related to infrastructure and thus do not face a problem related to capacity over-buildup either. Uncertainties, if any, are of the unforeseen kind.
What is the significance of commissioning these investments worth Rs 450,000 crore in 2009-10 and Rs 700,000 crore in 2010-11? A related measure is the gross fixed assets of existing companies. The total gross fixed assets of the non-finance companies in CMIE’s Prowess database was Rs 28,00,000 crore in 2008-09. This includes manufacturing, mining, utilities and services sector companies, but excludes banks and non-banking financial companies (NBFCs). The industry-wise coverage of the CapEx and Prowess database is thus similar in this respect. And this implies that the new capacities that are expected to be created in 2009-10 will be 25 per cent of the total outstanding capacities as of March 2009. The additions in 2010-11 will again be of a similar magnitude.
The outstanding gross fixed assets of non-finance companies (in the Prowess dataset) had doubled in the five years ended March 2009. Given the current pace of capacity creation seen in the CapEx database, it seems that it will double again, possibly in four years.
CMIE projections based on the CapEx database stop at 2010-11. But, the database allows us to make projections even further into the future. To do this, I assume that investment proposals take about four years to turn into capacity. Further, we assume that most of the proposals made in the boom period between 2005-06 and 2008-09 were mired in controversy and, therefore, may not see completion in the coming four years at least. Thus, my projections of investments getting commissioned in 2011-12 and 2012-13 assume less than 50 per cent conversion of projects that were announced four years ago.
It is difficult to say which projects will achieve completion and which will not. It is safe to assume that some will achieve completion and some will not. As is seen from the reasonably conservative assumptions made above, even if you do not believe a large chunk of the investments being announced by India Inc and captured in the CapEx database, the outcome of the recent announcements will be very big.
Even if we consider deeper discounting of the proposals made in the past three years, the investments that will get commissioned will be large compared to historical levels of investments and compared to the outstanding assets of the industrial sector.
The author is Managing Director and CEO, CMIE; mahesh@cmie.com