Capital connection

The performance of the capital goods sector has continued to disappoint despite the economy expanding at higher than 7 per cent in the recent quarters. Recent readings of the Index of Industrial Production show that capital goods output declined for four months of this fiscal year to July. On a cumulative basis, output declined 21.3 per cent in the April-July period, compared to a year ago. However, these headline numbers can often be misleading. There are indeed pockets of growth within this vast sector. An analysis by this paper found that manufacturers of industrial consumables for automobiles, construction, food processing and petrochemicals have reported good growth in their sales revenues and profits. Other areas, such as the Railways, where public expenditure has been stepped up, have also benefited. In comparison, equipment manufacturers for sectors such as electricity generation and household electricity appliances are lagging.

One key takeaway from these trends is that increased public expenditure and clearing of policy cobwebs have driven demand for plant and machinery. In the coal sector, for instance, auctions to allocate coal blocks completed over a year ago have pulled in fresh investments in production, generating demand for machinery and equipment. Similarly, in the Railways, identifying priority projects from a shelf of projects announced in the past and speeding up their implementation, as well as construction of metro rail projects across the country, have benefited manufacturers of equipment required for these projects. The same effect is seen in roads where the Centre has speeded up work on expansion of the road network over the past two years. Intentions to focus on renewable energy, inland waterways, ports and smart cities too will gradually increase demand for machinery required for implementation of these projects. Yet, it needs to be noted that a pick-up in economic activity and implementation of new projects will not necessarily always lead to fresh investment in creating new manufacturing facilities. There is a lot of slack in the installed capacity created over the past decade. It is only when businesses are close to reaching full capacity and confident of continued demand that fresh investments are made. This is the case with the power sector. While power generation and demand have risen, as has electrification, the output of power equipment-makers is yet to rise, since there is excess generation capacity at the moment.

Going forward, the Centre needs to continue to identify projects across several other sectors that need to be completed on a priority basis. Given the strained financials of India Inc and the banking sector’s bad loans problem, investment in infrastructure will have to be driven by public expenditure. Consumer spending is expected to climb as the country goes into the festival season, providing additional stimulus, even if largely for consumer durables and automobiles. For capital goods, though, there are no quick fixes. Sustained economic expansion is the only solution.

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