Faint Signs Of Investment Revival On The Horizon – Is the Worst Over?

Disappointing as the first quarter gross domestic product (GDP) growth figures may have been for the government’s economic managers, it should not have been surprising. To recap, in April-June 2016-17 (Q1), GDP grew only 7.1 percent – the lowest in five quarters.

Though most economists from rating agencies and investment banks have been pointing out that this was below market expectations, they had been red-flagging the continued depressed investment scenario for quite some time now. Just last week, an India Rating report had pointed out that “the key factor that is holding the acceleration of industrial growth is investment recovery”.

GDP data released by the Central Statistical Office (CSO) on August 31 bear this out. Gross fixed capital formation in Q1 was only 28.3 percent of GDP (at current prices) against 31.6 percent in Q1 of 2015-16. Significantly, there has been a slight decline of 1.1 percent in absolute terms. This is definitely not a good sign. A sustained growth of the economy cannot come only on the back of consumption demand; the revival of investment demand is essential.

Also, this revival cannot depend overwhelmingly on the public sector; private sector investment has to step up.

But there are faint signs that things are beginning to look up for industry.

A quarter on quarter tracking of the fixed capital ratio numbers shows that the 28.3 percent of GDP figure is a slight improvement over the continuous decline from the 31.6 percent mark in Q1 of 2015-16. The ratio had dropped to 26.9 percent in Q4 of 2015-16 (January-March 2016).

The Nikkei India Manufacturing PMI (purchasing managers index) for August, released on September 1, at 52.6, is at a 13-month high. This report shows robust growth in new work and export orders as well as expansion in total order books. New business inflows, it says, have expanded at the fastest pace since December 2014.

The Reserve Bank of India’s quarterly Industrial Outlook Survey conducted during Q1 of the current fiscal bears this out. The survey showed business sentiments about Q1 were muted (though the response was better than for Q4 of 2015-16), but there was optimism about Q2 (July-September). There was a rise in the number of respondents expecting production to increase, order books to expand, capacity utilisation to be normal or above normal, export demand to grow and even employment outlook to improve. This comes on the back of a steady improvement in capacity utilisation since Q2 of 2015-16. RBI’s quarterly Order Books, Inventories and Capacity Utilisation Survey (OBICUS) shows that capacity utilisation had reached 74.1 percent in Q4 of 2015-16, the highest since Q4 of 2014-15 when it was 74 per cent.

Infrastructure and industrial projects stalled for various reasons had been a major cause for lack of investor interest. That situation, too, is beginning to improve. Rating agency Crisil quotes Project Monitoring Group data that 1,950 issues relating to 511 mega projects worth around Rs 22 lakh crore have been resolved till June 2015. A State Bank of India Ecowrap report points out that the number of stalled projects has dropped from 759 in March 2015 to 374 in June 2016. The government’s announcements on August 31 resolving the issue of arbitration cases and the construction industry will also get a large number of projects off the ground.

Economists also expect growing consumer demand to push up capacity utilisation and, therefore, investment. Agriculture growth in Q1 of this fiscal may have dipped (1.8 percent against 2.6 percent in Q1 of the previous fiscal) but this was a hangover of last year’s drought conditions. Agriculture output is set to look up this year, with good monsoons and an increase in area under cultivation and this is bound to give a fillip to rural demand, which accounts for close to half of overall demand. Urban demand, for its part, is going to get a boost from the implementation of the Seventh Pay Commission award.

Given all this, an investment demand revival appears certain. It is only a question of when. India Ratings thinks the revival will not be easy and will be long drawn out. Crisil expects it to happen by the end of this fiscal. Clearly, it is going to be a wait and watch story for now.