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Capex on new projects declines further in Q2

By Sachin P Mampatta
October 11, 2022 13:33 IST
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Expenditure on new projects slowed down for the second quarter in a row amid an uncertain global environment and higher borrowing costs.

Capex

Illustration: Dominic Xavier/Rediff.com

There were new projects worth a cumulative Rs 3.26 trillion in the July-September period, according to data provided by project tracker Centre for Monitoring Indian Economy (CMIE).

This figure is much less than Rs 4.39 trillion in the June quarter (Q1FY23) and Rs 8.46 trillion in the March quarter (Q4FY22).

 

Spends on new projects declined 4.4 per cent on a year-on-year basis, too, from Rs 3.41 trillion in Q2FY22. Expenditures on new projects include those by firms or governments to build addi­tional factories or construct new bridges.

Capex can be an important driver of economic growth. The figure for completed projects declined 14.7 per cent YoY. The value of stalled projects was also down.

P Ramakrishnan, vice president, Larsen & Toubro, said the second half of FY23 is expected to be better than the first half, during a July investor call.

“…we expect public capex spends comprising of the Centre, states, and public sector units in the current year to be better than that of the previous year.

"Hopefully, private capex will also witness improvement in the second half of the current year,” he said.

"Private sector capex, I would say, would be largely focused on minerals and metals, and to some extent on the buildings and factories space.

"As is already available in the public domain, the steel sector and other non-ferrous metal producers are looking forward to the expansion of their existing production lines, including putting in additional complimentary equipment in their existing plants,” he added.

The investment rate is likely to increase to 36 per cent of gross domestic product (GDP) in the next five years, from around 31 per cent, according to the Asia Insight report (dated September 6) by global financial services major Morgan Stanley group.

The report is authored by Morgan Stanley’s chief india economist Upasana Chachra, Equity Analysts Girish Achhipalia and Sumeet Kariwala, and Equity Strategist Ridham Desai.

“The supply side factors have aligned with an improvement in demand conditions, which in our view will help fructify a secular rise in investment to GDP.

"Indeed, domestic demand conditions are robust as indicated by rising capacity utilisation rates,” it said.

Capacity utilisation has been improving, according to the Reserve Bank of India (RBI) quarterly Order Books, Inventories and Capacity Utilisation Survey (OBICUS).

Companies typically invest in new factories and production capacity when it is felt that existing capacity may not keep up with demand.

“At the aggregate level, the capacity utilisation (CU) in the manufacturing sector rose to 75.3 per cent in Q4:2021-22, from 72.4 per cent recorded in the previous quarter, showing improvement for the third successive quarter,” said the RBI note.

The RBI also raised interest rates last week amid global central bank efforts to control inflation.

Higher global borrowing costs are expected to affect growth prospects.

“In our view risks to our outlook are more external and cyclical than domestic and structural.

"As such, a global recession could have potential downside risks to India's cyclical growth momentum leading to a delay in capex recovery,” added the Morgan Stanley report.

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Sachin P Mampatta in Mumbai
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