Capital news

Industrial growth is at a 10-year high, albeit because of a statistical aberration that saw last year's growth numbers fall dramatically following the Mumbai floods, and export growth in the first five months of the year has remained above 20 per cent, yet again. Add to this the upbeat news with regard to capital expenditure, and the macro-economic news continues to be cheerful. As this newspaper reported earlier this week, India Inc's capital expenditure in 2005-06 (at Rs 1,10,000 crore) was nearly 30 per cent higher than in the previous year. Since growth is taking place on the back of corporate earnings that continue to power along, last year's momentum could get carried forward this year as well.

While the import data do not reflect this (strangely, non-oil imports rose just 4.4 per cent in August), domestic capital goods production rose 20 per cent in the first four months of this year, compared to 14 per cent in the corresponding period last year. The huge step-up in investment announced by auto leader Maruti Udyog a few weeks ago typifies the prevailing sense of optimism. And there can be little doubt that, once the newly approved special economic zones become reality on the ground, you can expect another investment surge as people flock to the new zones. The rush to create new industrial capacity, plus the momentum in sectors like retailing and housing, should translate into a continuation of the investment boom that has contributed to the rapid pace of overall economic growth.

If there is a downside to the news on capital spending by the corporate sector, it is that the industrial base is too narrow, as just 25 firms accounted for over 53 per cent of the spending on physical assets last year, and the share of the top 100 firms was as much as 80 per cent. This translates, among other things, into a natural limit to job creation as the larger firms typically tend to be more capital-intensive (though the fact that leaders like Reliance and Bharti are getting into retail will mitigate this somewhat). The concentration of investment outlay also makes capital formation vulnerable to the ups and downs of a single company's fortunes. However, it is worth bearing in mind that such concentration is not unique to emerging market economies like India's.

The other issue of concern is the low share of textiles (a mere Rs 5,280 crore last year) in total corporate investment ""at a time when Chinese textile exports still face the threat of sanctions in major markets. It would seem that India's textile companies have not woken up sufficiently to the new market opportunities that have opened up, or they are still held back by a variety of domestic constraints. The textile associations argue that the low number could be a problem with the data. It would seem that only a fraction of the Rs 15,032 crore spent on capital investment last year under the Textile Upgrade Fund Scheme (TUFS) found its way to the India Inc database that deals with the organised sector. But, the figures on industrial production show that textile sector growth has been quite poor""and has even been slowing down. Given the importance of this industry on account of its backward and forward linkages, and the export opportunities that have opened up, this is an area that needs urgent attention.