Capex or capital expenditure is a very important ingredient for a nation's economic growth. In fact, the slowdown in capex by Indian companies is one of the biggest reason why the Indian economy slowed. Companies have to execute new projects to hire more people and stimulate the economy.
This is why experts always look at capex to understand the economy. The Reserve Bank of India recently published a report about private investment.
Here are some pointers that will help you make sense of the RBI data:
The year 2014 may have seemed promising, but it wasn't great in terms of investments. In 2014-15,companies planned to invest Rs 1.459 lakh crore. This is much lower than the planned investment of Rs 2.15 lakh crore in 2013-14. Even the number of companies investing reduced to 830 from 1065 in the previous fiscal, as per the RBI report. This was because of weak economic conditions like slow growth in corporate profits and poor consumer demand.
There are different kinds of capital expenditure. Some investments can be for expansion, while some can be the start of new projects. "Big ticket 'New projects' with longer gestation periods have reduced in recent times," the RBI said in its report. New projects accounted for 39.7% of the total cost of projects in the current year as against 65.2% share in the previous year, the report said.
One reason for poor investments is the high cost. To tackle the high inflation, the RBI has kept interest rates quite high for many years. This discouraged companies to borrow money and fund projects. As a result, companies now are looking at alternative options like private funding and foreign direct investments. Bank-funded capex fell 30.8% in 2014-15 to Rs 1.284 lakh crore. Companies also shunned the market-initial public offerings (IPOs) and share sales too remained low, just Rs 700 crore. Meanwhile, private and foreign funding nearly doubled to Rs 75,700 crore in 2014-15 from Rs 42,400 crore earlier.
Nearly half of the planned investments in 2014-15 were in the infrastructure space, especially in the power sector. This is good news for the economy. After all, no country can develop without proper infrastructure.
The RBI expects an improvement in corporate investments in the current fiscal. This is because a number of economic factors have improved like inflation, fiscal and current account deficits, and a rise in foreign investment inflows. "The low manufacturing growth could improve with policy efforts and better input supply. Though consumption demand remained weak, an upturn in the capital goods production seems underway, which could signal a revival in the investment cycle," the RBI report said. However, this would need significant government action like allowing stalled projects to start, implementation of reform measures as well as addressing financial stress on the sectors like power.
You can read the RBI report here: Read more
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