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For those looking for signs of an investment revival, the signals emanating from the latest estimates of the Index of Industrial Production (IIP) are bound to disappoint.
While the overall index has contracted 0.8%, what is particularly worrying is that the capital goods segment, a measure of investment demand, contracted by 24.9% in April. Including April, the capital goods segment has now contracted for six consecutive months.
This comes after recent GDP data showed that gross fixed capital formation (GFCF), a proxy for investment, contracted by 1.9% in the fourth quarter of 2015-16. While GFCG had risen by 7.1 and 9.7% in the first and second quarters, respectively, it had slowed to 1.2% in the third quarter. This decline has occurred despite the 8.5% rise in the index of eight crucial core sector industries in April, against 6.4% in March.
The latest numbers suggest that despite an increase in public sector spending (centre, states and PSUs), the crowing-in effect that many hoped for hasn’t really materialized. Private sector investments continue to remain sluggish.
Analysts are expecting the proceeds of the 7th pay commission and a good monsoon to boost consumption. This in turn would increase capacity utilization rates and thus spur private sector investments. But this scenario is only expected to play out over the second half of the financial year. It is thus quite likely that a broad based revival in private sector investments is atleast a few quarters away.
