Capex recovery will be slow PDF Print E-mail
Wednesday, 01 May 2019 00:00
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That the creation of net fixed assets has slowed substantially in the last five years, as data from CMIE shows, isn’t surprising. For one, it is the services sector that has driven the economy over the last decade. Moreover, the general slowdown in the economy, primarily the result of the twin balance sheet problem, has left capacity utilisation at levels of 75% or thereabouts, not necessitating fresh capacity addition in manufacturing. Some sectors such as automobiles and telecom have seen large investments and companies such as Tata Steel have set up new facilities.

However, by and large, manufacturing companies have tended to be quiet. While demand hasn’t exactly gone through the roof, tough labour laws, too, have reined in their ambitions. In the last two years, promoters with spare cash have opted to pick up assets via the inorganic and IBC routes, especially steel, cement and power plants.That is probably why the level of gross fixed capital formation (GFCF) as a share of GDP has stagnated at around 28-29% of GDP and the manufacturing sector isn’t throwing up enough job opportunities. Given the economy is losing momentum and demand is flagging, it doesn’t seem likely private sector capex will pick up meaningfully in the next two years. Much of the blame for this lies with the government; the frequent changes in regulations have resulted in turmoil in the telecom sector while it has been unable to deliver fuel to private sector utilities, pampering public sector units. Investments into sectors such as renewable energy, too, have slowed due to operational constraints—falling tariff rates and higher input costs. In the future, businessmen—and bankers—will be extremely wary of risking capital in areas which are vulnerable to changes in regulations and difficult labour laws. In short, the cost of doing business is going up as are the uncertainty levels.

The good news, as the CMIE data shows, is that the pace of investments in intangibles such as patents is going up. Indeed, a greater focus on R&D would be of great benefit to the country not only because of the technological advancements it would achieve but also because it will utilise the large pool of scientists. But it is worrying that fixed investments—in plant and machinery and such—are slowing. Although better technology and a growing shared economy will help improve productivity, the number of jobs created may fall far short of the numbers needed. Also, CMIE’s data shows, dividend payouts have risen to 77% of net earnings compared to 50% earlier, suggesting promoters are taking home more money. While this trend could have been exacerbated by the large amounts that the government has taken out from public sector undertakings, it is nonetheless a worry.



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