The Reserve Bank of India (RBI) on Monday said moderation in sales growth and the declining profitability in India Inc were keeping the investment outlook insipid for the current financial year. In addition, high fiscal deficit is seen as a hurdle for reviving private investment.
“The time-phasing details of projects that have been sanctioned institutional assistance for various years up to 2011-12 indicate that total intended capital expenditure by private corporate (non-financial) firms declined in 2011-12 and can be expected to decline further during 2012-13, as planned investment in new projects is likely to remain low,” the central bank said in its report on macroeconomic and monetary developments.
“Overall, (a) declining trend in investment demand from the private corporate sector has emerged as the major drag on overall investment.”
Aggregate project costs moderated to Rs 2.1 lakh crore in 2011-12 from Rs 3.9 lakh crore in the previous year. The share of the power sector in proposed project cost remained the highest in the fourth quarter of the last financial year, followed by metal and metal products, and textiles.
One key reason for the slowing in investments was a dip in profitability of private sector companies. While sales growth for select non-government and non-financial listed companies remained strong in the first three quarters of 2011-12, it moderated in the last quarter.
This, combined with a rise in input costs and higher interest expense, eroded companies’ profit after tax.
The banking regulator said pricing power of companies had weakened after the decline in their operating and net profit margins during the last financial year.
“Along with the decline in sales growth, the stock-in-trade to sales ratio has also declined in the fourth quarter of the last financial year. This decline points towards a pessimistic corporate outlook for demand conditions ahead,” RBI added.
While high fiscal deficit is crowding out private investment, the outlook for improving fiscal position is bleak as government’s subsidies are likely to increase.
Commenting that achieving two per cent subsidy target crucial for fiscal consolidation, RBI said, “Capping the subsidies within the budgeted limits would necessitate steps to allow the pass-through of international crude oil prices to domestic prices, failing which it would be difficult to achieve the overall deficit targets.
“Given the deterioration in the fiscal situation, the option of using fiscal policy to stimulate aggregate demand remains unavailable unlike in 2008-09 when the previous period of fiscal consolidation helped to provide the necessary fiscal space... fiscal space would need to be created by controlling revenue expenditure to provide more resources for capital expenditure which could crowd-in private investment.”
