Private Sector Investments In India Plunge During Q2

The private sector in India has witnessed a significant decline in investments for new projects in the three months ending September 2023. 

According to data released by the Centre for Monitoring Indian Economy (CMIE), the total value of new project announcements from the private sector plummeted to just Rs 0.8 trillion during this period. This marks a 79.2 per cent drop compared to the previous year when new projects worth Rs 3.8 trillion were announced during the same timeframe.

Simultaneously, the government's project announcements, which typically encompass critical public infrastructure initiatives like roads, have also taken a hit. In September 2023, these announcements stood at Rs 0.4 trillion, reflecting a substantial 72.5 per cent decrease compared to the previous year when the figure was Rs 1.4 trillion.

One of the primary drivers behind this downward trend is the lower tax collections, which were anticipated to impact government spending. A report by global financial services group Nomura highlighted concerns that the fiscal deficit target for the financial year 2023-24 (FY24) is now appearing increasingly challenging to achieve. The fiscal deficit is a measure of the amount the government spends beyond its earnings, relative to the gross domestic product (GDP).

The impact of this economic shift is expected to affect both revenue expenditure (comprising salaries and other recurring payments) and capital expenditure (encompassing long-term investments, such as infrastructure development). Experts anticipate that the slowdown in capital expenditure will likely manifest in the latter half of the current financial year. 

Nomura's report said, "We see fiscal headwinds to the FY24 fiscal deficit target of 5.9 per cent of GDP from lackluster tax collections, lower disinvestment proceeds, and strong momentum in expenditure growth relative to budgeted assumptions. While the bulk of the heavy lifting needs to come from revenue expenditure consolidation, given the political landscape, it could most likely materialize through a slowdown in capital expenditure in H2. If not, the fiscal deficit target would be at risk."

Despite this challenging economic landscape, it is worth noting that the completion rate of existing projects has shown some resilience. While it has declined since June 2023 when approximately Rs 7.9 trillion worth of projects were completed, the September 2023 figures, with projects worth around Rs 2.2 trillion completed, are still higher than pre-pandemic levels. In September 2019, completed projects were valued at less than Rs 1 trillion, rising to around Rs 1.4 trillion in September 2022.

The decision of companies to invest in new factories and projects often hinges on the utilisation of existing capacity. Recent data from the Reserve Bank of India's Order Books, Inventories, and Capacity Utilization Survey (OBICUS) for March 2023 indicates that capacity utilisation has improved in the manufacturing sector for three consecutive quarters. 

In Q4 2022-23, capacity utilisation reached 76.3 per cent, up from 74.3 per cent in the previous quarter. While the economic landscape remains uncertain, this suggests that some sectors are showing signs of recovery, albeit with pockets of unutilised capacity, potentially contributing to the decline in new investments.