An analysis of capital investments across 22 large sectors by CRISIL Research shows that the slide in investments continues and it expect s a 2% decline in the current fiscal. What’s more worrying is that private investments – on skid row since the last couple of years – are expected to decline around 8% this fiscal.
Utilisation rates in 10 out of 12 large industrial sectors are wallowing at 5-year lows causing new project announcements to dry up. Consequently, fresh investments (projects announced / awarded in past 1 year) are expected to account for a mere 20 per cent of total investments. As a result, says Crisil “we believe that a meaningful recovery in capital investments will only be visible from fiscal 2017 - - when we expect to see a 7% increase.”
Crisil believes Industrial sectors will be the drag. According to it “Industrial capex, which accounts for close to 30% of aggregate capital investments, is expected to decline sharply by 16% this fiscal, mainly due to low utilisation rates. On the other hand, infrastructure investments will grow at a moderate 4% helped by favourable policy changes and higher budgetary allocations (there was a 50% increase in allocation towards infrastructure in the last budget.).
A sector-wise snapshot of investments reveals large sectors such as power generation, aluminium, steel, cement and refining & marketing are weighing on investments, while the infrastructure segments such as urban infrastructure, national highways and renewable energy are preventing a bigger decline in overall investments.
Low capacity utilisation is the key challenge faced by most industrial sectors. For 10 out of 12 large industrial sectors Crisil analysed, current capacity utilisation is lower than their 5-year average. For instance, in the metals space – particularly steel and aluminium – India has created surplus capacities in the last few years and is turning into a net exporter from being a net importer. In addition, sectors such as refining & marketing and petrochemicals are also being affected due to the global decline in commodity prices.
Apart from paper, most sectors are very close to their 5-year lows in term of capacity utilisation and still some time away from their peak utilisation rates. Till the gap narrows, it is very difficult to envisage a broad-based pick-up in the capex cycle.
Most sectors are very close to their 5-year lows in term of capacity utilisation and still some time away from their peak utilisation rates. Till the gap narrows, it is very difficult to envisage a broad-based pick-up in the capex cycle, says Crisil.