At Rs 560,000 crore, the projects commissioned in 2009-10 will be double those in 2007-08 and higher than those ever seen in the last ten years, says Mahesh Vyas
The importance of capital formation in growth cannot be understated. Gross capital formation grew at a rate of nearly 16 per cent per annum in real terms over the six years ended 2008-09. This was when real GDP grew at the rate of 8.5 per cent per annum. In each of the last five years, growth in capital formation was much higher than the growth in the GDP. Thus, capital formation was a major direct source of growth for the economy in the recent past.
In 2008-09, capital formation grew by 7.7 per cent, much lower compared to its growth till the preceding year. Growth in GDP also fell to 6.6 per cent. This fall and a few other factoids have led to fears that the growth in capital formation is in danger and, therefore, growth in real GDP is also in danger. I find this fear ill-founded.
One fact used to support the argument that capital formation is in danger is that new investments proposed by companies fell steeply in the quarter April-June 2009. Indeed, CMIE’s CapEx database does show a sharp fall in new investments in this quarter: These fell to Rs 120,000 crore. This is only a quarter of the investments announced in the preceding four quarters.
However, this fall will only impact (if at all it does) capital formation at least three years into the future, and not now. This is because three years is the lower bound of the gestation time for an average project announced.
What matters more than new announcements or even the outstanding projects under implementation is the commissioning of projects.
The commissioning of an additional capacity is of great importance. This measure is more important than even capital formation. Capital formation includes changes in inventories. It is useful to separate this out, as is done by most analysts, and use the resultant measure called the fixed capital formation.
But, even fixed capital formation includes capital expenses on projects that will not be productive in the year in which the expenses are incurred. What matters for growth is the completion and not just creation of new productive capacities. The production of steel is obviously a lot more useful than the mere motion of setting up of a steel producing mill.
The commissioning of a new productive capacity immediately raises the level of the demand for productive labour, working capital, raw material inputs, utilities and services. It leads to the immediate generation of additional goods and services. On the other hand, capital formation translates into growth with a lag. Capital formation in long-gestation infrastructure projects such as the Sardar Sarovar project or the Konkan Railway project can lead to substantial lags between capital formation and growth.
Thus, the measurement of commissioning new capacities is more important in anticipating growth prospects than the analysis of the trends in capital formation.
CapEx provides the measure of commissioning of new capacities. And, this does not indicate any slowdown in capital formation. On the contrary, it suggests a substantial acceleration in 2009-10.
Projects involving an aggregated investment of Rs 650,000 crore are scheduled to be commissioned in 2009-10. After discounting for some spillovers even in this advanced stage of implementation, we believe that only Rs 560,000 crore will be commissioned.
All of this Rs 560,000 crore will not be spent in 2009-10. Most of this was spent in the earlier years. But, what is important is that these projects will become productive enterprises from 2009-10.
At Rs 560,000 crore, project commissioning in 2009-10 is higher than ever seen in the past ten years. In 2007-08 and 2008-09, the commissionings were of projects that involved investments of Rs 220,000 crore and Rs 280,000 crore, respectively.
What matters is that an additional 50 million tonnes of cement production 21 million tonnes of crude oil production, 7.7 million tonnes of petroleum products, 1.6 million two-wheelers, and 6 million tonnes of steel production capacity (all per annum) would be created in the year as would be new capacities in several other industries. Each of these projects can be identified and their progress is monitored continuously in the CapEx database. This is not a mere theoretical construct, or a mathematical model that projects growth. It is measurement. It is this capacity that forms a part of the Rs 560,000 crore of completions that will see capital formation growing at a healthy clip.
Further, 2009-10 is not an end of an investments boom phase. Investments are expected to continue for the next two years, at least. The global liquidity crisis caused a mere blip in the implementation of projects. It did not stop the investments boom phase, as was feared. The drought-like conditions at home are unlikely to deter capex. The fiscal and monetary policies are expansionary and accommodating to ensure that the investments phase will continue unhindered into the future.
The CapEx database shows that projects worth a much larger Rs 10,00,000-12,00,000 crore are scheduled to be commissioned in 2010-11 and 2011-12. This is only a tentative estimate. Some of the projects may get delayed, some may get derailed. But, it is equally likely that some projects may get added to the list of those that we today believe will get commissioned. This column had reported in April 2009 that investments worth Rs 490,000 crore would get commissioned in 2009-10. That estimate has since risen to Rs 560,000 crore.
Today, we have no reason to believe that the projects that will get commissioned in the next two years would not be between Rs 10,00,000-20,00,000 crore. Yet, as a matter of abundant caution, even if we were to believe that only half the projects that are scheduled to get commissioned in the coming two years do indeed get commissioned, we will be witnessing a continuation of the investments boom for a few more years.
Thus, there is no case for a slowing down of the investments boom in the next two years. No boom phase can continue for ever. At the same time, we do not see this one stopping any time soon.
In the meanwhile, new investment proposals have picked up in the CapEx database. In July 2009, new proposals worth Rs 90,000 crore were announced. This is much better than the average of Rs 40,000 crore per month recorded in the preceding quarter.
The author is Managing Director and CEO, CMIE; mahesh@cmie.com
