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With little room left for govt capex, economy looks at private investments

The economy did better than expected in the second quarter of the current financial year, shrinking by 7.5 per cent against a massive 23.9 per cent in the first quarter, despite the fact that investment continued to decline in the economy. Experts want the government to spend more on capex to spur economic activities in the remaining two quarters of the current financial year.

After massively cutting its capex by 38 per cent in the second quarter, the government did raise it by 129.4 per cent in October. But how much will the government spend? It has Rs 2,14,654 crore left from this year's budget estimates in capex after the October spending. The Centre has also talked of adding Rs 25,000 crore more for infrastructure, which will lead to Rs 2,39,654 crore of spending left in the last five months.  

On the other hand, the total gross fixed capital formation (GFCF) would be Rs 19.55 trillion in the second half even if it repeats the performance of the first half of the year. That amply showed that much of the investment and impetus to raise economic activities have to come from the private investments.

In the second quarter of the current financial year, GFCF was down 7.3 per cent in the second quarter after falling massively by 47 per cent in the first quarter. One may argue that in a shrinking economy, investment will also fall. So, let us look at GFCF as a percentage of GDP. It stood at 25.7 per cent of GDP in the second quarter against 19.5 per cent in the first quarter. The first quarter was an exception since there was almost complete lockdown in the first two months. However, the investment rate in the second quarter was also the lowest in any quarter in the recent past, barring the April-June period of the current financial year.

Over the years, the incremental capital-output ratio in India's economy deteriorated rapidly. It used to be four when the economy was growing at nine per cent 2005-06, 06-07 and 07-08, but rose to around seven per cent in 2019-20. This year is a different story in the first two quarters--the investment rate isn't leading to any growth at all.

In such a scenario, GFCF, particularly from the private investments side, has to be raised so that it stood at a much higher level than Rs 19.55 trillion in the second half.

Experts who tracked the corporate sector did not see any major announcement for capex by India Inc.

Shamsher Dewan , vice-president and head corporate sector, said,’ I don’t think capacity addition has been announced anywhere as such in general.”

He said it is only about capex which was already planned or vital for business purposes. There is no greenfield capex and in the brownfield zone, only expenditure crucial for business is being made.

However, finance minister Nirmala Sitharaman did find that capacity expansion is taking place in companies. "I also see reports and I am also talking to industry leaders who are looking at capacity expansion,” she said recently.

She said in core sector industries -- be it cement, be it iron and steel, integrated plants --all are going for capacity expansion.

To a query that private investments are weak, she said, "You are seeing expansion in capacities… it can’t be without investment in the private sector."

"More investments (are being made) into expanding capacity, not just in one unit, but across the country. You are hearing of expansion," Sitharaman said.

Companies, particularly in the cement sector, did announce more capex. For instance, UltraTech Cement board earlier this month had approved an investment of Rs 5,477 crore for raising capacity by 12.8 million tonne, which would be a combination of brown and green field expansions.

Citing economic recovery in the domestic market and uptick in demand for cement, the current approved investment amount would be over and above the planned Rs 1,500 crore capex for FY21.

Meanwhile, the government did announce a productivity linked scheme (PLI) to woo investments in ten sectors of manufacturing.

Last month, the Union Cabinet had approved a Rs 1.45-trillion package by extending the PLI scheme to 10 more sectors. The government said the policy has been tailored to attract investments, boost domestic manufacturing, enable companies to become part of the global supply chain and generate employment opportunities.

This approval was in addition to the already announced Rs 51,311-crore PLI for three sectors. With this, the total incentives under the PLI schemes come to Rs 2 trillion.

The government hoped that the PLI schemes would provide 200,000-300,000 direct employment over five years.

Among the 10 sectors approved, the largest chunk of incentives, at over Rs 57,000 crore, would go to automobile and auto components, followed by ACC battery at over Rs 18,000 crore.

Pharma products, for which Rs 15,000-crore PLI was announced, include patented drugs, biopharmaceuticals, phytopharmaceuticals (herbal), drugs not made in India, cell-based or gene therapy products and orphan drugs (for very rare diseases) among others.

Devendra Pant, chief economist at India Ratings, said PLI is for the medium to long term.

He said the government capex, if invested in those sectors where the gestation period is long, would take time to spur the economy. For quick results, investment needs to be done in areas where gestation period is not so long such as rural roads.

Investments have also been arrested by low demand in the economy. The private final consumption expenditure, which denotes demand, shrank 11.3 per cent even in the second quarter. The first quarter was exceptional when it fell 26.7 per cent. Even as the percentage of GDP demand grew only marginally higher at 57.9 in Q2 from 57.1 in the first quarter.

In October demand was expected to rise due to festival season. In fact, Society of Indian Automobile Manufacturers (SIAM) did say that passenger vehicles moved to positive with 14.19 per cent growth in domestic sales at 310,294 units in October year-on-year.

However, the Federation of Automobile Dealers Association (FADA) said the passenger vehicle (PV) registrations saw a year-on-year drop of 8.8 per cent to 249,860 units in October 2020. This means that while PVs sales rose from factory to dealers, the sale at the retail level declined. If the trend continues, it would only lead to inventories which would ultimately lead to less production and less investments. 

Table: Key economic indicators at a glance
Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21
Growth in gross fixed capital formation in % YoY  4.57 -3.91 -5.16 -6.48 -47.1 -7.3
Growth in private final consumption expenditure in % YoY  5.50 6.39 6.64 2.72 -26.70 -11.30
Gross fixed capital formation as % of GDP  28.9 26.5 26.2 26.0 19.5 25.7
Private final consumption expenditure as % of GDP  58.5 60.2 62.9 59.5 57.1 57.9
Source: MoSPI

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