Mahesh Vyas is managing director and CEO of Centre for Monitoring Indian Economy Pvt Ltd (CMIE). He is the chief architect of CMIE’s proprietary databases. He created the Consumer Pyramids database by setting up the largest, fastest and technologically the most advanced household survey in India. The latest data from CMIE suggested that new investments in the country plunged to a 14-year low in the December quarter. Vyas said there will be a further decline in new projects and revival of old projects.
“The numbers at macro level for investments are sobering so we see new investment projects being announced falling and this is not a plunge, it is not a sharp decline but it is a part of steady decline that has been happening for the last three-and-a-half year,” Vyas told CNBC-TV18.
In an exclusive interview, Vyas also spoke about the reason for the sequential decline in capital expenditure (capex).
Watch the video here:
Give us your picture of the last quarter’s investment performance. Some of the capital goods companies say that something positive is happening in terms of capital expenditure capex?
The capital goods companies could be doing well and we will not dispute that. The numbers at the macro level for investments are sobering so we see a decline in new investment projects. This is not a plunge, it is not a sharp decline but it is part of a steady decline that has been happening for the last three-and-a-half year.
Therefore, if you do a proper time series analyses of this and we did that recently and we found that this is a trend that began somewhere in June 2015 and after that investments have only steadily declined. So now you reach a point where you become a 14 year low and this seems to be a part of a trend. If you keep on falling you will become 20-year low as well. So, (a) this is part of a trend, (b) there were expectations in June 2018 that there will be a revival. We did see some projects increase and proposals being made, we saw an increase in the order book flow and we anticipated an increase to come about, but that hasn’t played out; the new investment proposal is still very low.
The second thing is that there is also a fall in the revival of old projects. So you have a decline in revivals and you have a decline in new investments and at the same time in December 2018 quarter we saw an increase in the stalled projects.
There is one big 3 trillion tonne refinery project in Maharashtra in Konkan region which got stalled. So this increase in stalled projects and a decline in new investment projects leads to a fall in the outstanding projects in itself. So we are seeing the stock of investments in hand actually having fallen and fallen quite a bit.
What are the main reasons? Is this a financing issue that banks have a whole and therefore they are not able to finance these projects or is it that there are too many projects that have been completed like power for instance and not used and being dragged to the National Company Law Tribunal (NCLT)? What could be the reason for this long drought?
It is not a financial problem and that is clearly ruled out. We even asked entrepreneurs questions as to why a project is stalled etc... and the only people who say financing is a problem are those who are actually not bankable. So, if you really have a very difficult balance sheet then you have a financing problem, but if you have a decent project then nobody says that. The recent refinery got stalled because it had land acquisition problems and it just could not get off the ground. The problem, you rightly pointed out, that a lot of projects have been commissioned already and capacity utilisation is still low. So the expectation of capacity utilisation rising, what we saw in Order Books, Inventories and Capacity Utilisation Survey (OBICUS) in June 2018, has actually come down again. So the problem is more to do with demand.
The point is that I am looking at the quarter-on-quarter drop and that is also little disconcerting. The 62 percent fall in private sector projects quarter-on-quarter because a lot of the companies that we were speaking to, seem to be giving the indication that some kind of brownfield expansion etc. is starting, we heard a lot of players talk about 80 percent capacity utilisation. If indeed we are at 80 percent, should this not be close to an inflection point when the pickup actually starts. Do you see that anytime in the near future or do you think election uncertainty will perhaps keep plans on hold?
There are two things. One, do not read too much into the year-on-year growth rate which is 6 percent plunge because the latest figures will get upgraded, will go up. So if the total investment proposals in December 2018 quarter were about a trillion rupee. I expected to go up 40 percent thereabouts. So it will go up and the 60 percent decline will look a lot less troublesome than it looks now. So there are revisions that come in due course of time.
The second problem is that if the companies are saying that they are seeing 80 percent in their order books or so on. I think that is true as well. So, I think the larger companies and the existing companies are doing well but new ones are not coming in. There are sectors like power where you will not see big investments. There is a very good ramp up in investments in the road sector and that has continued which will show up in the balance sheets of implementing companies. So there is some truth in what the companies are saying but the larger picture is still not very good.
The GDP numbers, the gross fixed capital formation numbers, the last number we got was 12 percent higher. For the last 6 months in the IIP numbers the capital goods number has been in double digits. The RBI, when it presented its monetary policy, they gave some outlook of the economy. They said the capacity utilisation has gone to 76 percent which is higher than the long-term average of 75 percent. Where this dissonance is then. What kind of reality are they talking about? Your numbers are the cleanest because they are actually going to the micros. How will you reconcile these two?
Let us take RBI numbers. RBI says 76 percent is higher than the long-term average of 75 percent but the long-term average consist of a lot of ups and downs. Investments pick up when capacity utilisation is at the higher end, not just a shade of the long-term average. So that argument doesn’t hold and it is not 76 percent; it’s a shade lower than that now. So the RBI’s argument is only partly correct. Go back to the IIP and the GDP numbers, what they are looking at is essentially growth in production of steel, cement and some machineries. All these have done slightly better because you do see growth in roads construction. Roads construction does take a lot of cement and steel and does take some machinery as well. So a little fillip over there does show that investments are growing, but the larger picture of all investments put together is still dismally low.
We are still seeing completion projects are getting delayed substantially. So all the numbers you are saying is right except RBI. I think, little lower stretched argument but all the numbers are only giving a small picture.
A word on the public sector capex side and government spend. They have already spent so much in the year and now tight purse strings. I do not know what more is possible, but how do you think this is going to shape up the overall picture for FY19 ahead of elections?
At least from our capex database, traditionally the government is playing a counter-cyclical role. So when investments go up, public sector and private sector both increase investments and when they go down, both come down but in the last two years, we have seen the government acting counter cyclically.
So road investment that I keep emphasising, is doing much better than the entire trend. The problem is the path forward is getting hazier because competitive politics is leading to a lot of the resources being frittered away into loan waivers and a whole lot of other things which will leave the fiscal space for counter-cyclical activity to be very limited. So I see this good action from the government in the last two years to possibly getting strained in the coming years.