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13 Jul 2017 6:23 PM, Trends Mahesh Vyas

Completion of investment projects to slow down

Investments worth Rs.0.98 trillion were commissioned during the quarter ended June 2017. This is substantially low compared to the average commissioning of about Rs.1.5 trillion worth of investment projects per quarter in the past several quarters.

In the next few weeks the data for the quarter ended June 2017 will be revised as more information becomes available. As a result, the estimate would go up to over Rs.1 trillion.

In the past three years, while the announcement of new projects slowed down, there was an acceleration in the projects completed. During 2016-17, a record Rs.6.1 trillion worth of projects were commissioned. This was much higher than the Rs.5.73 trillion worth of projects that were commissioned during 2015-16 which, in turn was much higher than the Rs.4 trillion worth of commissioning in 2014-15.

In the preceding five years ended, project completions hovered between Rs.3.5 trillion and Rs.4 trillion. Therefore, the record of 2014-15 and 2015-16 is truly a break from the past and one of the few positive measures on the investments front in the recent past.

However, there are signs that this jump in investments could run out of steam pretty soon. There are at least two reasons in the CapEx database that point towards this.

First, the quarterly completions peaked in March 2016 at Rs.2.4 trillion. That was five quarters ago. Completions thereafter have been much lower. Quarterly data on completions are somewhat volatile as they vary substantially from one quarter to another. A trailing four-quarter average evens out these variations and yields a better trend in completion of projects. This trailing four quarter average peaked in December 2016. In the following two quarters, the average completions have declined. The trend therefore seems to suggest a slowing down of completions in the coming quarters.

A stronger reason to believe that completions would slow down in the coming years is because of the continuing fall in new investment proposals. Most projects completed around now were proposed nearly ten years ago.

1,658 projects were completed in 2016-17. These involved a cost of over Rs.6 trillion. Of these, we have the gestation period (i.e time taken to complete the project) of 222 projects, which account for Rs.5.3 trillion or 88 per cent of the total investments completed during 2016-17.

The top sixty per cent (by value) of the investment projects completed during 2016-17 had an average gestation period of 9.8 years. The median age of these projects was 8.9 years.

The average gestation period of all 222 projects was 6.8 years and the median was 6.4 years.

Evidently, most of the projects being completed today were initiated about 7-10 years ago. More than half of them were initiated before 2008-09.

About six years ago in 2011, the investment cycle dipped. This is when new investment proposals had started to fall. Thus, the stock of projects from which projects get commissioned during a year will start to fall going ahead. This will slow down the rate at which projects get commissioned in the future.

The total stock of projects is still very high. Only 2 to 4 per cent of the outstanding projects get commissioned during a year. But, this proportion has been falling and the base has not been rising at the pace at which it used to in the past.

According to the projections made by promoters of projects, investments worth Rs.13 trillion are scheduled to be completed during 2017-18. But, this is unlikely to happen. A preliminary examination of the progress in implementation brought this down to Rs.9.8 trillion but, our past experience shows that even this would be scaled down. During the quarter ended June 2017, investments worth Rs.2.2 trillion were to be completed. But, less than half of that was actually commissioned.

Going by the past record, the total investments completed during 2017-18 would be less than the Rs.6 trillion worth of projects completed in 2016-17.