Capital Expenditure- Downward Spiral

Fresh investments are slowing due to poor demand and low capacity utilisation. This has worrying implications for future growth.

- Avneet Kaur

The Indian growth story is not firing on all cylinders as capital spending – both in private and public sectors – is on a downward spiral. Investment projects announced by India Inc. in 2016/17 stood at ₹8.17 lakh crore, the third lowest since 2005/06. Project completion during the year grew a paltry 0.8 per cent to ₹5.74 lakh crore, compared to 17 per cent in 2014/15 and 42 per cent in 2015/16. Taken together, the capital expenditure (capex) data from the Centre for Monitoring Indian Economy (CMIE), gross fixed capital formation, or GFCF, details from the Central Statistics Office (CSO) and data from the Index of Industrial Production (IIP) also indicate a sharp slowdown in capex and asset formation.

Mahesh Vyas, Managing Director at CMIE, blames it on sluggish demand. “Capacity creation grew at a rapid pace till 2011/12 in anticipation of good growth in demand. However, demand has been lagging, and companies are now facing low capacity utilisation. As additional demand can be met through higher capacity utilisation, there is no need for them to create additional capacity,” he says. After a steady decline for three consecutive quarters, capacity utilisation in the manufacturing sector stood at 72.7 per cent for the quarter ended December 2016. IIP data, a performance indicator across sectors, also show sluggish growth over the past 10 months. Also, Gross Value Added (GVA) in manufacturing sector stood at 7.9 per cent in 2016/17 compared to 10.81 per cent the previous year. Services also saw a dip in its growth from 9.7 per cent in 2015/16 to 7.74 per cent in 2016/17.