|Thursday, 15 September 2011 00:00|
While the higher 9.8% inflation for August, up from 9.2% in July, has probably sealed the deal in favour of a 25 bps rate hike on Friday, the news coming out continues to get worse. After the IIP data which showed a considerable trending down, comes a study from RBI which suggests the combination of rate hikes and an uncertain economic environment—both domestically as well as globally—has hit investment levels quite badly. While corporate investments (in terms of the capital expenditure of projects sanctioned by commercial banks and financial institutions) rose 27% in 2007-08, 34% in 2008-09 and 18% in 2009-10, this slowed to a mere 5% in 2010-11 and all indications are this will become negative in 2011-12. In terms of nominal rupees, investments rose from R2,09,192 crore in 2007-08 to R3,31,291 crore in 2009-10—after that it rose marginally to R3,48,863 crore in 2010-11.
What of 2011-12? The way things work, loans sanctioned get utilised over three to four years. So, based on this, the RBI study points out, R2,61,095 crore of investment will take place in 2011-12 out of the loans sanctioned in previous years. Once you take into account funds already raised from abroad, this rises to R2,74,919 crore. So, if investments in 2011-12 have to be even the same level as they were in 2010-11 (R3,82,641 crore including the money raised from overseas), another R1,07,722 crore of fresh investment proposals need to be bankrolled—“going by the assessment on date”, the study concludes, “capital expenditure of (this) order does not appear to be feasible”.
Equally worrying is the composition of the investment taking place. The share of infrastructure in overall investments is up from 50.6% in 2009-10 to 55.9% in 2010-11 and, within this, that for power is up from 29.7% to 47.4%. Ordinarily this would have spelt good cheer, but we’ve seen how the power sector is in trouble with regulators refusing to allow hikes in tariffs that are required to make good the investments—right now, several of the ultra mega power projects are trying to renegotiate tariffs with governments which are reluctant to do so. Any slowdown in corporate investments will have serious repercussions on growth, given that this is the single-largest segment accounting for more than a third of the investments. While it’s obvious RBI’s rate hikes are having little effect on curbing inflation, any move to curb a hike in productive capacity will only make things worse.