Business isn't investing; RBI sees capex fall in 2011-12

Some warning signals have been visible on the investment front for some time now. Whether it is a shrinkage in investment expenditure or dips in capital goods production, the writing is now clearly on the wall.

In July, the Index of Industrial Production showed a 15.2 percent fall in capital goods production. Now, the Reserve Bank of India (RBI) has forecast a decline in capital expenditure (capex) spends in 2011-12 compared to 2010-11.

In simple words - companies are not investing.

In its latest monthly bulletin, the RBI has estimated a base level of corporate capital expenditure of Rs 2,74,919 crore, based on money raised for projects sanctioned during previous years which will continue in 2011-12. The bank argues that in order for capex spends to even match those of 2010-11, projects worth another Rs 1,07,772 crore need to be sanctioned.

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This, “going by the assessment on date, capital expenditure of the above order does not appear to be feasible”. It further goes on to say that “Capital expenditure in 2011-12 is likely to be lower than the previous year”.

For an economy in need of investments to sustain its growth rate, this is a disappointing projection. It’s even more so on the back of the fact that 2010-11 did not see a significant increase in investment expenditure either.

After seven years of double-digit annual growth in investment expenditures (between 18 and 70 percent) funded 90 percent through banks, 2010-11 was the first year when the figure grew by a paltry 5.3 percent.

Interest rate hikes, and the corresponding increase in the cost of credit, are likely to be one of the key reasons for the expected decline in capex spends. The RBI has been tightening domestic liquidity since February 2010, resulting in rising loan rates.

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However, while a slowdown in spending was to be expected, a decline in investment spends is so far not visible in related indicators. For instance, for the April-July 2011 period, the pace of capital goods production has softened to 7.3 percent. This is far softer than the average of over 23 percent growth during April-July 2010, but still does not indicate a shrinking capital goods production.

In fact, investments measured as a component of GDP too picked up pace in the first quarter of 2011-12, after remaining flat in the last quarter of 2010-11.

It needs to be noted here, though, that capex spends are only with respect to the corporate sector and do not take into account government and household investments. So it may well be that overall investment in the economy is positive despite a hit to corporate investments.