Investment boom to boost India Inc's prowess

Growth in the 2000s has been based on sound financials and sustainable plans, says Mahesh Vyas.

Ten years ago, in January 2001, corporate India had just emerged from two tests of its metier. It had performed miserably in both. The first was in 1997 when the boom immediately after liberalisation died out rather early.

The second was the even shorter dotcom boom around the turn of the millennium. In both cases, herd mentality and access to easy money did the companies in.

In the mid-1990s, even a shoe-string manufacturer was willing to be convinced by merchant bankers that he could set up a power plant under the power purchase agreements bandied then. In the late 1990s, venture capitalists sought out anyone who was heard saying that he had an "idea".

The last decade has been a big break from this gratefully short period of adventurism. With the benefit of hindsight, we can say this was the period of learning. The experience of the 1990s taught us that finance is no substitute for enterprise and easy money does not produce more entrepreneurs.

Now, companies are clearly focused on cash generation; they have kept gearing ratios low and have shed activities that do not form a part of their core. This focus has been maintained even during the hectic pace of growth of the last five years.

The growth has been organic as well as inorganic; domestic and also international. Most importantly, the growth was based on sound financials and sustainable business plans. As a result, corporate India has been able to weather the storm of September 2008 much better than any another country.

Companies started accelerating their investments into new capacities from 2004-05. According to CMIE's Prowess database, the gross fixed assets (GFA) of non-finance companies grew by 11.5 per cent in 2005-06 after having grown at a rate of barely 7 per cent per annum in the preceding five years. In the next three years, the growth was well above 15 per cent per annum. Even in 2008-09, the growth was a robust 15.6 per cent.

The manufacturing sector's growth in GFA was higher at 20.2 per cent in 2008-09 - the highest growth rate achieved in GFA since 1995-96.

What is remarkable of this growth is its resilience to the major shock that happened in 2008-09. The services sector has seen a much higher rate of growth in the decade ended 2008-09. Between 2000-01 and 2008-09, it grew at the rate of 14.8 per cent per annum while the manufacturing sector grew at 11.1 per cent per annum.

The dynamics of this acceleration in investments is also captured by CMIE's CapEx database. The datasets are quite different. Prowess includes investments made by companies that are already in operation.

CapEx includes the investments by such companies and also by those that are not in operation. It includes a greenfield project being setup by a completely new company. It also includes investments by non-companies, such as the government.

The CapEx database provides quarterly snapshots of investments. It, therefore, has greater frequency of observations than the balance sheets-based observations in the Prowess database.

Three indicators provide a good insight into the changes in investments during the past one decade. One is the new investment proposals made by entrepreneurs and government, and the second is the investment proposals that were completed. A third useful measure can be the rate at which investment proposals fail. We will study this as well. 

New investment proposals indicate the confidence that enterprise has on prospects of the future growth. The CapEx database shows that this confidence that had remained tepid for about a decade, turned around in the second half of 2004.

The database shows a small blip around 2000 to mark the shortlived rise in investments around the internet boom. But for the rest, the trend in new investment proposals was more or less flat at Rs 50,000 crore (Rs 500 billion) per quarter.

From September 2004, new investments have never fallen below Rs100,000 crore (Rs 1 trillion) per quarter. The break from the period prior to September 2004 quarter is very sharp. In 2004, the average new investment proposals made per quarter was Rs 84,172 crore (Rs 841.72 billion).

In 2005, this almost doubled to Rs 167,423 crore (Rs 1.67 trillion). And then it doubled again to Rs 342,248 crore (Rs 3.42 trillion) in 2006. In 2007, this reached Rs 427,607 crore (Rs 4.27 trillion), and then to Rs 475,227 crore (Rs 4.75 billion) per quarter in 2008.

The slowdown is evident only in the first three quarters of 2009 when the average fell to Rs 455,570 crore (Rs 4.55 trillion) per quarter. This last number is also a slight overestimate at it includes some unrealistic proposals from Gujarat in the first quarter of the year.

I would discount the proposals in the first three quarters of 2009 down to about Rs 300,000 crore (Rs 3 trillion) per quarter. But, even after this discounting, it is evident that while the acceleration has stopped, new investment proposals have not.

Have new proposals translated into new capacities? Many projects get proposed but they do not get completed. This is understandable as conditions can change and entrepreneurs may change their plans accordingly.

Admittedly, there could be other reasons to announce and then abandon projects. So, it is reasonable to assume that only some of the proposed projects will get completed. But, it is also expected that as the number of proposals go up, with some lag, completions should also go up. This what is observed in the CapEx database.

But, CapEx reveals an interesting phenomenon of the behaviour of completions against abandonings. Till 2004, both were in equal measure. Roughly, the value of investments being abandoned was similar to the value of investments being commissioned. But, since 2004, the value of investments being commissioned has been distinctly higher than the value of projects abandoned. This is in spite of the global liquidity crisis of 2008.

The continuation of the new investments boom and the greater success in completion of projects imply that the investment boom is on, and this augurs well for growth in 2010 and beyond.