Govt push helps investment cycle in June quarter

Pvt sector holds back, waits for key reforms

The government has managed to push the investment cycle up in the June quarter by higher infrastructure spending but companies are still holding on to their purse strings and waiting for key economic reforms like the goods and services tax, and land acquisition and labour laws.

According to the Centre for Monitoring Indian Economy (CMIE), the uptick in the June quarter came after investment rose in 2014-15, the first time since 2008-09.

Government investment accounts for almost the entire increase in projects under implementation since the start of 2014-15, while private sector projects under implementation have declined during most of the quarters since 2012.

The states and the Centre made close to Rs 1.9 lakh crore of capital expenditure in the June quarter. Of this, state governments spent around Rs 1.1 lakh crore, and the Centre the rest, according to the CMIE.

But in a worrying sign, projects under implementation by the private sector fell nine per cent between September 2012 and June 2015 to Rs 43 lakh crore.

“The current trend echoes India’s investment turnaround of the early 2000s, when the government drove the investment cycle, before the private sector took over from 2005. Reviving the investment cycle is crucial to putting India’s growth on a higher and more sustainable trajectory,” said Saurav Anand, economist, South Asia, at Standard Chartered Bank.

The private sector’s share of projects under implementation and capital expenditure fell to 49 per cent in June 2015 from 60 per cent during 2007-2012. At the same time, the government’s share rose to 51 per cent from 40 per cent; its projects under implementation increased every quarter.

The private sector faces significant headwinds from leverage, weak assets in the banking sector and excess capacity in some sectors. “Since these issues will take time to resolve, a pick-up in private investment is still two to four quarters away,” said Anand.

CEOs say they are holding on to investments as global and domestic conditions are volatile and there is no clarity on reforms promised by Prime Minister Narendra Modi.

“The way the goods and services tax was blocked in Parliament shows there is no unanimity among political parties on key reforms. If the tax is delayed, you can expect private sector expenditure to be delayed by another year,” said the managing director of a large metal and mining company who did not wish to be named.

Many private sector projects are stalled over environmental clearances, land acquisition and lack of funding. Most of these projects are in the highways and power sectors.

According to the CMIE data, new investment intentions worth Rs 1.18 lakh crore were announced in the quarter ended June 2015, up 37 per cent year-on-year. This is the fourth consecutive quarter of a rise in project proposals.