According to the Central Statistical Organisation’s estimates, India’s gross fixed capital formation increased by 2.4 per cent in real terms in 2016-17. This marks a substantial slowdown from the 6.6 per cent growth recorded in 2015-16 and, it is also lower than the 3.2 per cent growth recorded in 2014-15.
Quarterly estimates released by the CSO indicate that the decline began in the second quarter of 2016-17. Growth in gross fixed capital formation fell from 7.4 per cent in the June 2016 quarter to three per cent.
In the December quarter the growth fell further to 1.7 per cent and finally in the March quarter, investments growth was in the red, posting a -2.1 per cent growth.
CSO’s national accounts data shows that investments have been anemic since 2012-13. They have been growing at single digit rates for the past five years. Real growth needs to get back to double digits rates to ensure sustainable economic growth and employment. Instead, the trend worsened substantially during 2016-17.
The decline of 2016-17 began even before demonetisation. The steepest fall in GFCF growth was in the quarter ended September 2016, which preceded the November demonetisation.
It is likely that the decline in investments began even earlier than the second quarter of 2016-17. CSO’s national accounts estimates show a 5.8 per cent growth in GFCF in the March 2016 quarter and a 7.4 per cent growth in the June 2016 quarter. But, results of listed companies indicate stress by March 2016 itself.
While the profit and loss statements of listed companies are available every quarter, balance sheet data is available at 6-months interval - only as of March and September. These show that as of March 2016, net fixed assets had shrunk by 3.7 per cent. Then, in September 2016, net fixed assets of listed non-finance companies shrunk even more - by 9.2 per cent. This was the first time that listed companies had collectively displayed such a sharp shrinkage in their asset base.
The revised IIP series shows that the production of capital goods has been in the red since September 2016. A new series, “infrastructure and construction”, shows a significant weakening more recently - in February and March 2017.
On the demand side, the IIP data shows good growth in consumer non-durables. But, consumer durables have been registering negative growth rates since December 2016.
The worsening of GFCF growth in the last quarter, the deterioration in infrastructure and construction index of IIP and the negative growth rates in consumer durables indicate that the investment slowdown, which began nearly five years ago and worsened during 2016, continues well into 2017.
One apparent silver lining is the positive growth in net fixed assets of listed companies as of March 2017. While the results are not complete yet, the aggregated net fixed assets of 2,404 companies show a growth of 7.2 per cent. This is a big relief compared to the two consecutive declines seen in the past year. Possibly, the low base caused by the 3.7 per cent decline seen last year could have contributed to the growth. Possibly, this growth rate would decline as the remaining about-1,100 companies declare their results. But, equally likely this positive growth signals a small rebound from the negative growth rates seen till recently.
The rebound, if any at all, is unlikely to be strong. The CapEx database does not show any turnaround in the investments cycle. New investment proposals during 2016-17 were half of their levels in 2010-11. Rs.8.2 trillion worth of new projects were proposed during 2016-17. This was the same as in 2015-16, which was lower than the Rs.10.1 trillion worth of new investments in the preceding year, 2014-15.
Data for April and May 2017 shows that new investment proposals have slowed down substantially. Projects worth only Rs.622 billion were proposed during these two months together. This implies a monthly flow of new investment proposals worth only Rs.311 billion. This is less than half of the average Rs.680 billion worth of new investment proposals seen in the preceding two years.
Apparently, the motivation to invest into new capacities is falling around now. Interest to invest had rebounded during 2014-15 after two years of extremely low levels of new investment proposals (only around Rs.5 trillion a year). The first two months of 2017-18 indicate that we could head towards the same low levels again.