Business - India;Projects worth $17.5 bn shelved

M.Allirajan

CHENNAI: India Inc appears to be having a second thought in going ahead with project investments. In the six months to September this year, projects
worth Rs 85,448 crore (about $17.5 billion) have been shelved - which is 50% more than what FIIs pulled out from Indian stock markets so far in 2008. The figure, in fact, is a whopping 148% higher than a year ago, data shows.

"Companies postponing projects should not come as a surprise given the magnitude of the impact created by local and global conditions," says Subir Gokarn, chief economist, Standard & Poor's, Asia Pacific. The value of projects shelved in June and September quarters is the highest since March 2007.

The upturn in the investment cycle that began in the middle of 2003-04 sustained till 2007-08. "We have seen a significant build-up in capacity in the last 3-4 years. It is almost inevitable that the cycle will peak after four years. Though the rate of growth is still decent, we are seeing some deceleration," he says.

Latest data only confirms this assessment. Industry-wise projects under investments have been falling for the past two quarters. It stood at Rs 33,53,318 crore for the quarter ending September, a good 31.8% lower than the year-ago period, according to data from the Centre for Monitoring the Indian Economy (CMIE).

In sectors where utilisation has come down sharply, there would be some stagnation, Gokarn says. In textiles sector, projects under implementation have been on the decline for the last three quarters. Industry players have been stating that capacity utilisation has come down sharply in recent months.

Revenue expectations from capacity creation, the cost of setting up that capacity and level of utilisation of existing capacities play a crucial role in a company's decision to invest more. "If a company finds itself in a situation where current capacities are not fully utilised, prospects for growth are low and money is costly, it would defer projects," he explains.

However, there are some who still think there will not be a huge drop in capital expenditure or capex (the cost of long-term improvements) for large projects. "Capex in large projects peaked in 2007-08 (fiscal), but is not likely to drop much in 2008-09," says Mridul Saggar, chief economist, Kotak Securities.

This comes at a time when companies are facing an acute capital crunch with avenues to raise money both in the domestic and overseas markets drying up fast. Resources raised from the domestic primary market dipped 91.2% during April-October 2008 to Rs 46,729.44 crore, CMIE data shows.

The global financial crunch has taken a toll on companies looking to raise money abroad. Resources raised from overseas markets stood at Rs 591.43 crore for the September '08 quarter, an 88.51% fall compared with the same period the previous year. The June quarter was even worse with resources raised totalling a mere Rs 497.57 crore against Rs 20,940.75 crore a year ago.

"Aggregate demand in India, both consumption and investment, is also likely to decelerate with large asset price correction," predicts Kotak's Mridul. "Investment demand also gets affected as firms may face financing constraints due to their lower leveraging ability as a result of the fall in value of their collaterals."

"With falling business confidence and deterioration in investment climate, we could expect a downturn in the investment cycle this year," he says.