Investment activity is imperative for the growth of the economy as it has potential to generate output in multiples. The investment in the current fiscal has been subdued so far and a rebound in investment will necessary to enhance the pace of growth.
The following report is an update on the overall investment activity in the economy during the current fiscal. The report is divided into two parts and looks at the financing part of investment as well as proxy indicators of real activity:
1.) Flow of funds covering bank credit, corporate bonds, external commercial borrowings and foreign investments.
2.) Movement in key investment and industrial production indicators
Flow of funds
The flow of funds reveals a mixed picture with fund flow from domestic sources being lower during the current fiscal while fund flow from foreign sources showing a significant pick-up.
- Bank credit to the industrial sector (April – November) has contracted by 3.9% in FY20 from a positive growth of 0.3% in FY19. In FY20, the contraction has been broad-based with steepest contraction in small and micro industries (4%), followed by medium industries (3.6%) and then large industries (3.4%).
- Total corporate bond issuances (both private and public) during April-December (based on Prime Database) have marginally declined from Rs 4.1 lakh crores to Rs 4.0 lakh crores. The share of non-financial sector has increased from 19.4% in FY19 to 26.5% in FY20. Within, non-financial, the share of services sector (other than financial) has increased from 9.7% to 14% while the share of manufacturing has increased from 2.2% to 4%.
- Foreign direct investment (equity inflows) has seen a significant increase of 15% during April to September from $22.6 bn in FY19 to $26.1 bn in FY20. Out of $26.1 bn FDI in FY20, the sectors receiving highest contribution are telecommunication ($4.2 bn) and computer software ($4.0 bn) and other services sector ($4.5 bn) which accounts for almost 50% of total.
- ECB and FCCB registrations have seen a notable pick-up during April – October from $18.1 bn in FY19 to $28.7 bn in FY20.
Investment and production activity
- New projects announced (based on CMIE) during Q3 of FY20 at Rs 4.3 lakh crores has been 37% higher from the corresponding quarter a year ago.
- Project announcement by the government sector declined from Rs 81,740 crs during Q3-FY19 to Rs 62,808 crs during Q3-FY20
- On the other hand, project announcement by the private sector recorded a 60% jump from Rs 2.3 lakh crs during Q3-FY19 to Rs 3.7 lakh crs during Q3-FY20.
- Two new projects (one in the airline industry = Rs 2.3 lakh crs and one in the refineries industry = Rs 0.7 lakh crs) have driven the pick-up in private sector investment.
- New project announcements during April to December have seen a perceptible contraction of 29% from Rs 9.5 lakh crs in FY19 to Rs 6.8 lakh crs in FY20.
- The contraction in case of government project announcements have been 44% while in case of private sector announcements is 19%
- Table 1 shows the share of new projects announced of major sectors cumulatively for the period April-December,2019. Services account for almost half of the new projects announced during the current fiscal, driven chiefly by transport services
- The cumulative growth of IIP for capital goods during April to October has been at -12% during FY20 as against a positive growth of 8.9% during FY19.
- Capital goods have recorded contraction in the production in 10 consecutive months. The contraction has been more than 20% during each of the previous 3 months (Aug – October).
- Capacity utilisation (based on RBI survey) has seen a notable decline from 75.9% during Q3-FY19 to 68.9% during Q2- FY20. Lower capacity utilisation does not bode well for fresh investments to take place.
- Economics I Investment activity in the economy
- The flow of funds shows a mixed picture with greater reliance on foreign funds (via FDIs, ECBs and FCCBs) and lower reliance on domestic bank credit and corporate bonds.
- Investment activity in the economy has remained downbeat indicated by lower new projects announcements during the first 3 quarters of the current fiscal, contraction in capital good production, significant decline in capacity utilisation.
- New projects announced during Q3 have been notably higher driven by announcements of two major projects in the private sector
- A turnaround in bank credit disbursements to the industrial segment and higher borrowings via corporate bonds by the non-financial segment would be important for the investment activity to witness a reversal from the current position. Also, need to closely monitor the new projects announcements of the industrial segment over the next few quarters.
Madan Sabnavis, Chief Economist
Sushant Hede, Associate Economist
Rachna Gupta, Manager – Training