The Hindu Business Line : Will the optimism last?

Nothing quite captures the strength of an economy’s foundation and prospects than the sweep and depth of capital investments and expenditure from one year to the next. Investments in new plant and machinery do not simply sustain growth; they also raise the bar on productivity and therefore sharpen the overall competitive edge. The Reserve Bank of India (RBI) has been regularly assessing the capital expenditure of private and joint sector companies in a bid to gauge b usiness expectations for the year under review and make some kind of forecasts on the medium term. This year’s study on private investments for 2006-07 for the first time includes not just the companies part-funded by financial institutions and banks but also ones that raised funds through External Commercial Borrowings (ECBs), Foreign Currency Convertible Bonds (FCCBs) and domestic equity. The study, therefore, scrutinises capital spending by these companies as well, though it could not include companies raising debt through ADRs/GDRs and debentures/debt bonds.

With an expanded base for study the patterns that emerge are more representative of trends in capital spending. The study tells us that 2006-07 may have witnessed the highest level of capital spending so far, quite apart from the largest number of projects sanctioned to date. An interesting facet of the study is that in 2006-07, 1,054 companies with institutional assistance had projects worth Rs 2,83,440 crore to be phased up to 2011-12, compared to about half that amount sanctioned to 812 companies in 2005. Clearly, capital requirements have doubled within a year, disproportionate to the number of companies claiming funds. This provides a measure of the pattern of investments in the pipeline. Power heads the list, with a 26 per cent share, followed by metals and metal products with 16 per cent, and coke and petroleum with 15 per cent. Thus, more than half the projected capital spending will focus on infrastructure. While this is good news, sadly, there has been no change in the regional distribution of projects with such developed States as Gujarat and Tamil Nadu attracting new investments. Clearly, neither the SEZs nor State-level tax-breaks have steered private capital to poorer regions.

Looking ahead, the RBI hedges its optimism for 2007-08 with minor hurdles and then concludes on the right note. Business confidence may be high, as it avers, but the humps that the RBI steps around are ones that the economy cannot ignore. The rupee may be dear, business cycles may work their effects, but more harmful will be cross-eyed policy that bogs down land acquisition for fresh projects in controversy and unreasonable delays in sanctioned public power projects. In the event, can the optimism last long?

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