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The private sector has announced lower investments in new factories, plants, and other new projects in the three months ending September than previously.
The total value of new project announcements from the private sector was Rs 0.8 trillion, according to data released on Sunday by the project tracker Centre for Monitoring Indian Economy (CMIE). This is a 79.2 per cent decline from the Rs 3.8 trillion in new projects announced during the same period last year. It has fallen 85 per cent from the Rs 5.3 trillion worth of new projects announced in June.
The government’s new project announcements, which typically include roads and other public infrastructure, are down 72.5 per cent year-on-year to Rs 0.4 trillion in September 2023. It was Rs 1.4 trillion in September 2022, and Rs 1.2 trillion in June (Chart 1).
Lower tax collections were expected to affect government spending, according to a 27 September Asia Insights report from global financial services group Nomura authored by research analysts Nathan Sribalasundaram, Aurodeep Nandi and Sonal Varma. It noted that the fiscal deficit target for financial year 2023-24 (FY24) is beginning to look harder to achieve. The fiscal deficit is the amount the government spends over and above its earnings. It is measured relative to economic size as given by the gross domestic product (GDP). The effect would be felt on both revenue expenditure (Revex), which deals with salaries and other recurring payments; and capital expenditure (Capex), which involves investments in long-term assets like roads. The Capex slowdown is expected to play out in the second half of the current financial year.
“We see fiscal headwinds to the FY24 fiscal deficit target of 5.9 per cent of GDP from lacklustre tax collections, lower disinvestment proceeds and strong momentum in expenditure growth relative to budgeted assumptions. While the bulk of the heavy lifting needs to come from Revex consolidation, given the political landscape, it could most likely materialise through a slowdown in Capex in H2. If not, the fiscal deficit target would be at risk,” it said.
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The completion rate of existing projects has dropped from June but is higher than it was before the pandemic. Around Rs 2.2 trillion worth of new projects were completed in September 2023 compared to Rs 7.9 trillion in June 2023. The value of completed projects in September 2019 was less than Rs 1 trillion, and around Rs 1.4 trillion in September 2022.
Companies typically invest in new factories when existing capacity remains unutilised. Capacity utilisation has been improving in recent quarters, according to the Reserve Bank of India (RBI) Order Books, Inventories and Capacity Utilisation Survey (OBICUS) for March 2023; though nearly a quarter of capacity remains unutilised.
“At the aggregate level, capacity utilisation (CU) in the manufacturing sector increased for the third successive quarter to 76.3 per cent in Q4:2022-23 from 74.3 per cent recorded in the previous quarter...The seasonally adjusted CU for Q4:2022-23 remained stable at 74.1 per cent,” it said.
The improving finances of banks and companies are tailwinds for future Capex, according to capital goods major Larsen and Toubro spokesperson in its June earnings call with analysts.
“...conditions are favourable for a continued Capex cycle in sectors like infrastructure, power, which includes renewables, petrochemicals, and defence in the near to medium term,” he said.
