Capex pace set to hit slowdown; why this outlook is worrisome for India

Analysts, however, said since CPSEs’ borrowings had risen substantially in the last couple of years, they could cut down on raising fresh loans in the current year and therefore might miss the capex targets. (Image: Reuters)

While the Centre’s investment spending vis-à-vis the gross domestic product (GDP) is projected to decline in the current financial year, the central public sector undertakings (CPSEs) that had spearheaded the relatively high public investment growth last year might also reduce the capex pace in 2017-18. Although there could be exceptions like the NHAI which could step up investments this year, several of the large CPSEs like Coal India, ONGC, NMDC, NTPC, NHPC, HPCL and National Aluminium Company have their “cash and equivalents” at substantially lower levels now than a year ago, a situation that could slow their capex. Of course, despite the CPSEs’ reduced cash position — apart from high level of investments in the past two years, the share buyback obligations depleted their surplus cash — many of these firms have kept their capex targets higher in 2017-18 than in the last year. Analysts, however, said since CPSEs’ borrowings had risen substantially in the last couple of years, they could cut down on raising fresh loans in the current year and therefore might miss the capex targets.

If the farm loan waivers constrain the state government’s capital investments in the short term as presaged in the latest Economic Survey, the general government’s investment spending might come down relative to GDP in the current financial year, posing a risk to growth when private investments are continuing to be in the doldrums. The GDP growth in 2016-17 was predominantly driven by private consumption but public investments too had a small role. Capital spending by public sector (Centre, states and CPSEs) rose sharply from 6% of GDP in 2015-16 to 6.6% in 2016-17 mainly because CPSEs went on a investment spree to expand capacities.

However, the general government capex will likely decline to 6.3% of GDP in 2017-18, as per the Economic Survey, adding that the CPSE capex could be 2.3% of GDP in 2017-18 compared with a very robust 2.7% in 2016-17. The question is if there could be further slippages from even this projected level, given the shrinking cash surplus with some of the large firms. However, there are some government-run undertakings that are set to maintain accelerated capex momentum. The NHAI, for instance, seems poised to meet the investment plan of Rs 59,279 crore in 2017-18 from internal accruals and borrowings, despite a slippage in the first quarter. Last year, it had invested Rs 53,804 crore. The railways is also projected to do better, thanks to budget and off-budget resources.

Given the government’s commitment to bring down fiscal deficit to 3% and the stagnation in the tax-to-GDP ratio, the Centre’s capital expenditure to GDP ratio will remain at 1.8% of GDP for the three-year period until FY20, according to the medium-term expenditure framework tabled in Parliament recently. Even though the Centre’s capex rose 39% year-on-year in the first quarter of 2017-18, a slowing of the investments is likely in the latter half of the year. “Clearly, the government would remain constrained in expanding infrastructure through increased capital expenditure. The potential crowding-in of private investment would also remain largely unrealised,” said DK Srivastava, chief policy advisor in EY India.

According to Budget projections, CPSEs’ investments (excluding budget support) is projected at Rs 3.85 lakh crore in 2017-18, down from Rs 4 lakh crore in the previous year, again reflecting their go-slow approach in investments. “PSUs have a limited capacity to invest…so they will have limited impact on the overall capex growth in the economy,” said DK Pant, chief economist of India Ratings. The overall investment scenario also looks very bleak as banks are not in a position to lend further as corporates are under stress, Pant said. As per the Economic Survey, the private investment growth was estimated to be negative in 2016-17.

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