Published On : Tue, Sep 15th, 2015

RBI study: big slowdown in investment projects

New projects (those with funding from banks and financial institutions) have fallen to less than 40% of planned investments for the first time in at least five years
Mumbai/Nagpur: A Reserve Bank of India (RBI) study on corporate investments sounds cautiously optimistic saying that the expectation of a turnaround in investment demand persists. But this is qualified with a laundry list of familiar conditions such as unclogging stalled projects, cleaning up the mess in utilities’ balance sheets and so on.

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It makes two points that are not good news.

One, the pipeline of investments that companies carry forward have dipped to Rs.81,900 crore in 2015-16, as the first chart shows. This refers to the sanctions of institutionally assisted projects from banks and financial institutions and money raised through external commercial borrowings, foreign convertible bonds and local equity issues. In the past few years, companies didn’t often meet this investment target. It is also not surprising that this is showing a downward trend because of the economic slowdown in the previous years.

Second, this pipeline is not going to get filled up in a hurry as companies are spending on expanding current facilities and upgrading technology rather than building new factories.

“Big ticket ‘new projects’ with longer gestation periods have reduced in recent times,” the RBI paper notes.

New projects (the sample set here are those with funding from banks and financial institutions) have fallen to less than 40% of planned investments for the first time in at least five years, the second chart shows. A big caveat to these numbers is the data doesn’t cover all modes of funding available to firms. It doesn’t take into account the funds raised through foreign depository receipts, foreign direct investment, internal accruals or private debt placement. Given the general hesitancy among banks to lend, private debt raising increased to Rs.75,700 crore in 2014-15, an almost four-fifths jump.

That said, where is this turnaround in investment demand going to come from?

A second straight year of deficient monsoons has kayoed a consumer demand recovery. Earnings are poor—the first quarter earnings of capital goods makers showed that order growth inflows reduced from the year-ago numbers. Capacity utilization is still low, as RBI’s own Order Books, Inventories and Capacity Utilisation Survey, or OBICUS, shows. It is going to be a long, long wait for an investment demand revival.