After two disappointing years when the Covid pandemic hit the entire country, Indian industry is showing signs of optimism on the investments front. New investment proposals by the industry rose by 71 per cent during the calendar year 2022 with the lifting of lockdown restrictions and reopening of the economy.
What do figures reveal?
On a cumulative basis, total investment proposals during 2022 shot up to Rs 23.6 lakh crore as compared with Rs 13.8 lakh core in the previous year and Rs 11.6 lakh crore in 2020. In fact, the Rs 23.6 lakh crore announcements made in 2022 is the highest in the last six years, according to data compiled by CMIE and Bank of Baroda.
With reopening of the economy and gradual pickup in economic activity, new investment announced peaked at Rs 8.6 lakh crore in March 2022 quarter. Since then, in Q1 of FY23 and Q2 of FY23 a dip in new announcements was noticed. “However, things are now beginning to look optimistic. As of December 2022, there has been a steady pick up in new announcements and stands at around Rs 6.1 lakh crore compared with Rs 3.7 lakh crore in September 2022 and Rs 4.2 lakh crore in December 2021 quarter,” BoB said.
Will these plans materialise?
It has also been seen that while investment announcements are made, they do not necessarily materialize as can be seen from the gross fixed capital formation rate which has been stagnant in the region of 27-29 per cent in the last 5 years. In this context it would be relevant to look at the funding side where banks are important players.
The latest sector-wise data on banking business shows that non-food credit has grown by 8.9 per cent on a year-to-date basis ended November 18 2022. While the figure for last year was 1.8 per cent, data up to December 16 suggests growth increased further to 10.5 per cent as against 3.3 per cent last year, BoB research report said. “Making announcements is quite different from their fructification and the mirage has been seen in the last 5 years,” said Madan Sabnavis, Chief Economist, BoB.
Which sectors are showcasing intentions?
Chemicals and related products along with machinery accounted for 54.1 per cent share of total new announcements made between April-December of 2022, according to BoB. The chemical and related sector witnessed an uptrend in terms of new announcements, its share had been relatively lower previously. For the power sector, the share of new announcements has been growing at a healthy pace of 27.4 per cent, BoB report said.
Which sectors have declined?
The share of new announcements in the metal sector registered a dip in the nine-month period compared with last year for the same period. Transport services (mainly airlines) used to account for a bigger share of pie in terms of new announcements. However, its share of new announcements declined the most for the nine-month period as compared with the last three years. Construction and real estate sector also disappointed as the share of new investment projects dwindled this time, thus signalling not many new projects have not been launched.
Will rising interest rates hit investments?
While there has been improvement in growth in credit to industry, it is still the lowest performer as the overall non-food credit offtake was at 17.4 per cent as on December 16, 2022, according to RBI data. While the industry’s credit offtake was only 10.5 per cent, the progress on the whole is satisfactory given that the RBI has increased interest rates by 225 basis points since May 2022. Corporates were mostly depending on the bond market for funds till recently. However, bond yields have now started rising, making it a costlier route. On the other hand, banks have started hiking lending rates.
The responsiveness of bank interest rates to repo rate changes has been varied. On fresh loans the weighted average lending rate was up by 135 bps as retail and SME loans are largely benchmarked with this rate. In case of outstanding loans, the increase was by just 71 bps. In terms of the one-year MCLR the increase was around 96 bps. Corporate loans would typically be affected by the MCLR and hence the cost has not increased commensurately with the repo rate hikes of RBI.
