Capital expenditure became one of the key drivers of India’s economic development after liberalisation in 1991. India Inc added over Rs 13 lakh crore in fixed assets in the last 10 years (2000 to 2010), around 80 per cent of it over the past five years. Though the broader economic slowdown has hit capital formation in the last year, Indian companies are seeking greater comfort by setting up greenfield projects abroad. Going forward, however, we may see a significant moderation in investment.
A look at the trends in fixed-capital formation in the Indian economy post-liberalisation reveals two years when fixed capital formation stagnated or declined in real terms. The 5 per cent decline in 1992 was probably the result of the balance of payments crisis of 1991. In 2001 fixed-capital formation was flat once the tech bubble burst. Between 2006 and 2008, however, the capital market boom fuelled the first post-liberalisation corporate capex boom and significant overseas acquisitions saw capital formation hit an all-time high in 2009.
Reliance Industries tops the capital formation ranks with an investment of over Rs 2 lakh crore in ten years, increasing its oil refining capacity at Jamnagar and making substantial investments in the D6 gas field in the Krishna-Godavari basin. Sectors such as power, steel and telecom grew the most. Bharti Airtel made the most of the liberalisation in the telecom sector, growing capital formation at a compounded annual rate of 26 per cent in the last five years.
India Inc’s asset growth was more sustainable in the past decade because it was funded through internal resources and the capital market. The liberal distribution of profit took a hit, however, as corporate payout as a percentage of net profit declined with companies investing in expansion. In absolute terms, dividend distribution increased. No wonder the debt/equity (D/E) ratio, though still below one, declined from high of 0.84 in 2001-2002 to an average of 0.63 over the past five years.
Modernisation increased the productivity of manufacturing companies and reduce the reliance on manual labour. So, the profitability of the corporate sector increased at the cost of manual labour.
