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Upping govt spending can’t revive investments: India Ratings

Thursday, October 12, 2017

Muted demand and high leverage will ensure that a recovery in investment cycle does not happen before FY20, and government efforts on this by upping spends will also be ineffective, a report said yesterday.

"The broadbased recovery in the investment cycle is only expected to happen after FY20 as per our base case estimates due to moderate consumption demand outlook, weak pace of nominal growth recovery and global over capacity," domestic ratings agency India Ratings said.

The agency, a unit of global ratings agency Fitch, added that the corporates will shy away from investments despite the prevailing low interest rates.
Growth in gross fixed capital formation, which is a proxy for gauging investments, is also declining, the agency said, pointing out that it decelerated to 3% in Q1FY18 as against 6% in FY16.

Even as the government spending was up during FY16-17, there was a decline in the gross fixed capital formation in the same years, and the number has come down till 27.5% in Q1FY18, it said.

"If private corporate spending in manufacturing or infra continues to deteriorate, it may have a moderating impact on the gross fixed capital formation," it warned.

It is essential for the overall capacity utilisation to go up to 85-90% from the current 65-70% for corporates to start spending, it said, adding this is unlikely in the next two years.

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