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Economic slowdown has taken a toll on investments made in factories. It fell for the first time in 2011-12 since the global financial crisis of 2008-09, official data released on Tuesday showed.
Gross capital formation, an indicator of investment in industry, contracted 8.7 per cent in 2011-12, compared with 23.2 per cent growth the previous year, according to the Annual Survey of Industries.
“The poor economic climate is leading industrialists to reduce investment in the country,” said Pronab Sen, chairman of the National Statistical Commission.
In fact, the rate of decline in capital formation was higher in 2011-12 than in the 2008-09 crisis, when it fell 0.27 per cent.
However, overall profits of industry rose by 15.6 per cent in 2011-12, a bit lower than the previous year's growth of 17.2 per cent. Profits had declined during 2008-09, albeit by less than one per cent.
The Reserve Bank of India’s tight monetary policy to rein in inflation resulted in the highest growth of the interest costs incurred by industries, at least in a decade. The interest paid went up by 37.1 per cent in 2011-12 against 20 per cent a year ago. So, in just two years, interest cost rose over 50 per cent.
Madan Sabnavis, chief economist at CARE Ratings, explained this situation. “When interest rates are high and there is surplus capacity, investment does not take place as already produced goods are utilised.” He added that poor economic situation also creates a fear among industrialists to invest.
Sabnavis said the data painted a poor picture of the economy as businessmen were no longer attracted to invest in industries. “This is a major concern for the economy as one has to produce goods to get higher growth.” He added a “de-industrial hypothesis” has started getting reflected in the ground reality. “Manufacturing sector is losing its charm.”
However, when investments slowed down and interest rates rose, how come profit rose at higher pace in 2011-12? Sabanavis said: “Higher growth in profits means that companies retained profits increase and added them to reserves. Normally, under good economic conditions, these funds get invested in physical capital. But that has not happened as they are investing this money in financial assets.”
Economic slowdown also impacted setting up of new factories, which fell sharply by about 30 percentage points from 33 per cent in 2010-11 to just 2.8 per cent in 2011-12. Even the rise in the number of workers employed by these factories grew by only 5.4 per cent in 2011-12, compared to 8.1 per cent in the previous year.
The wages given to workers expanded by 16.6 per cent, compared with 24.2 per cent a year ago. At the aggregate level, wages were higher than the inflation rate in the economy. Average Wholesale Price Index-based inflation stood at 8.91 per cent that year. However, one should note that these are aggregate figures.
Factories incurred higher expenditure on rent at 20 per cent in 2011-12 against 12.4 per cent in the previous year.
The annual survey of industries covers all factories employing 10 or more workers using power and those employing 20 or more workers without using power. The index of industrial production, on the other hand, is not that comprehensive.
Industrial growth stood at just 2.8 per cent in 2011-12. Now price deflators would be applied to value industry output to arrive at the figures of industrial growth.
New figures for 2011-12 would be released by end-January 2014. There is wide expectation that the GDP figure would be higher than 6.2 per cent estimated provisionally for 2011-12.
Net -value added of output grew 18.60 per cent in 2011-12 against 18.99 per cent in the previous year. However, these figures are in current prices and are not inflation-adjusted.
Higher growth in profits means that companies retained profits increase and get added to reserves. Normally under good economic conditions these funds get invested in physical capital.
But that has not happened as they are investing this money in financial assets. Investing in fixed assets I.e. physical capital is not required as they have surplus capacity and demand is slack for their products.
Also with interest rates being high there is no incentive to invest for future.therefore this money is going into savings such as bank deposits, mutual funds.
