In this note, we attempt to parse the investment cycle, capturing the sub-trends in crucial sectors, analysing the possible reasons and enlisting some of the steps initiated by the government in recent months.
Post a brief recovery in FY10, investments have been on the skid. CMIE’s data on projects under implementation indicates that: (a) investment in power sector (~30% of total) has seen the most dramatic fall since late 2010, largely reflecting administrative bottlenecks; (b) investment in transportation services (~20% of total) has held up well, possibly due to swift government action and a stable regulatory regime; and (c) manufacturing capex (~18% of total), which was holding up well until late last year, slowed sharply thereafter, reflecting adverse impact of aggressive rate hikes. However, crucial positive developments in recent months—tariff hikes by several SEBs, proposal for SEB debt restructuring, more clarity on fuel supply with Coal India signing FSAs—if complemented with further action could help bolster business confidence.
Administrative hurdles, rate cycle tripping investments
Post a brief recovery in FY10, investments (projects under implementation) have been declining, touching a low of 8% YoY in June 12 compared to ~35-40% YoY couple of years ago. Infra-related investments (~55% of total), of which power-related projects are dominant, have been faltering since past five-six quarters, largely reflecting sharp slowdown in the government approval process. On the other hand, capex projects, accounting for ~30% of total investments, have been losing steam for the past two-three quarters, primarily reflecting mounting burden of tightening rate cycle.
Investments in power, metals faltering; buoyant in transportation
Sectoral data on projects under implementation indicates that downturn in the power sector has been the sharpest, plunging from ~40% YoY in FY11 to almost zero in June 2012. Complete uncertainty with regards to fuel linkages has been the key overhang on this sector. Metals sector too has bore the brunt of lingering administrative hurdles in the mining sector. However, the sole outlier in this downturn has been the transport services sector (including roads, railways, ports etc.), where investments have been relatively buoyant, possibly reflecting relatively stable regulatory environment.
Is government emerging from denial mode?
Over the past few months, several measures have been initiated, particularly in mining and power sectors—nearly 18 SEBs have hiked tariffs, government has come up with a plan for SEB debt restructuring, clarity on fuel linkages to power sector has improved with Coal India agreeing to signing FSAs with power companies, among others. To be sure, all these steps are incremental and need implementation before one can see any material impact on business confidence. However, they do point to a shift in government’s stance from denial and negligence to acknowledgement and action.
Regards,
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