Investment rate in India has been estimated to be at a two-decade low level in 2020 with Gross Fixed Capital Formation (GFCF) contracting for the first time in the past 17 years, according to CARE Ratings.
“Four out of six indicators namely investment rate, bank credit off take, industrial production of capital goods and new investment projects are indicating deterioration in the investment scenario while investment intentions and market borrowings have shown some signs of resilience,” CARE Ratings said in a report.
The bank credit off take remained subdued in FY20. The incremental bank credit off take until mid-March in FY20 was only one-third while year on year growth was less than half of what was a year ago. The bank credit off take has remained lacklustre due to overhang of the NPA issue in the banking system, liquidity crisis in NBFC segment and increased deleveraging activities by corporates, the report stated.
“ For the first time in the past 5 years, capital goods registered a contraction indicating decline in production of capital goods. Deceleration in capital goods has been led by contraction in commercial vehicles amidst the slowdown in the automobile sector, “it added.
Recovery of investment in the short term is not likely. Since mid-January 2020, novel coronavirus pandemic has led to disruptions in the economic activities globally. Domestic activities were already constrained on account of disruptions in the global supply chain and were further impacted post announcement of lockdown in the country. This could dampen investment scenario in FY20.
“Going ahead, some recouping may take place after lockdown is revoked and businesses re-start their normal operations. Central bank has been taking various efforts to push the bank credit cycle by lowering the interest rates. However, the cost of borrowing for the corporates has not come down as the transmission of the rate cuts has been sluggish,” CARE Ratings said.
Two sectors that have to aggressively drive this recovery have to be the government with frontloading of expenditure and the banking sector which would be involved in augmenting credit to all the sectors that require funding so that they are able to recover. “The right steps have already being undertaken and we may see further support from the government and the RBI if the need arises. However, whether and how quickly these efforts would lead to improvement in investments in the coming months remains uncertain.”it said.