Investment  mood rebounds, but is below pre-covid

Levers for a revival in capital expenditure seem to be falling in place as the pandemic wanes.

New projects worth ₹5.1 trillion were announced in the March quarter, a 54% increase from the preceding three months and more than double from a year ago, as economic activity continued to recover, provisional data compiled by the Centre for Monitoring Indian Economy (CMIE) showed.

The data was updated on Friday and may be revised later.

Project announcements also ended on a high note for the entire fiscal year, picking up by 70% to ₹14.3 trillion after plummeting to a 17-year low in 2020-21 due to the pandemic. However, the capex momentum is yet to reach pre-pandemic levels—annual project announcements averaged around ₹19 trillion from 2016 to 2019. Even before the pandemic, growth in new investments had remained subdued: it dropped in 2016-17 and 2017-18 and rose 5-6% in the following two years.

In the just-ended fiscal, both private and public sector companies announced significant capital expenditure plans—private firms’ capex spending doubled while public investment grew by 18%.

The momentum could only pick up further from here. The Union Budget 2022, with its focus on government capital expenditure, has set the trend for crowding in private capex, said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services.

A sharp rebound was witnessed across industries. New investments in the manufacturing sector grew 89% from a year earlier in 2021-22 after staying flat in the preceding year.

The top 10 projects—which included Reliance Industries’ Jamnagar Dhirubhai Ambani Green Energy Giga Complex Project and Bhushan Power and Steel’s Rengali integrated steel plant expansion project—together accounted for 47% of the sector’s new capex announcements.

“In manufacturing capex, there are signs of a pick-up in metals, cement, renewable energy, pharmaceuticals and PLI (production-linked incentive) segments,” Vijayakumar added.

New proposals in the electricity space nearly tripled while the services sector saw a 10% rise. However, investments by companies in the mining and construction/real estate sectors are yet to revive as they were down 27% and 44%, respectively.

The real estate sector can join the party over the medium term, as the unsold inventory of residential property units is down more than 40% from its peak, said an Axis Capital report dated 3 March.

On a quarterly basis, the progress was led by the electricity sector in the January-March period, which alone saw projects worth ₹3.3 trillion being announced, up 4.5 times sequentially.

Meanwhile, a stronger project completion rate also indicates an improving investment climate in the country. Overall project completion, in terms of value, rose 59% in 2021-22 after declining over the past two years.

The value of private projects being concluded jumped from ₹1.1 trillion to ₹2.3 trillion, while for government-owned projects, it improved from ₹2.2 trillion to ₹3 trillion. However, much of it was achieved in the October-December quarter, with not much progress made in the March quarter.

Project stalling rates, calculated as the value of stalled projects as a proportion of total projects under implementation, also offered some respite. Moderating by around 70 basis points to 9.7%, the stalling rate returned to single digits after nine years. This was largely driven by private projects, where the stalling rate declined by nearly 5 percentage points to 21.8%, while public sector stalling rates inched upwards to 4.1%, the latest data shows.

Since the capacity utilization for the economy is still languishing, the capex momentum could take some time to accelerate. “But the expansion cycle is clearly set,” said Vijayakumar. “The massive public capex, accompanied by the private capex, can trigger the virtuous cycle of investment and growth reinforcing each other.”

However, some headwinds could emanate from rising commodity prices and inflationary pressures.