Simply put, RBI view is that private sector companies are not investing adequate this fiscal. “In all likelihood, capital expenditures in 2011-12 are likely to be lower than the previous year,” said RBI in its latest bulletin.
It may be noted that in July this year, the Index of Industrial Production (IIP) had showed a 15.2 per cent drop in capital goods production.
Now in the latest bulletin, RBI has forecast a decline in capital expenditure (capex) spends in 2011-12 compared to 2010-11. The capital expenditure already planned to be spent in 2011-12 aggregated to Rs 2,74,919 crore and if companies do not defer the investment decisions and adhere to their investment plan, this pipeline investment is expected to provide the momentum of investment in 2011-12.
So, RBI argues, if the aggregate capex in 2011-12 were to match the capex envisaged in 2010-11 viz Rs 3,82,641 crore, the minimum capital expenditure of around Rs 1,07,722 crore needs to show up from the new investment sanctions of 2011-12 by the private corporate sector.
Interest rate hikes, and the corresponding increase in the cost of credit, are likely to be one of the key reasons for the expected decline in capex spends, points out RBI saying: “going by the assessment on date, capital expenditure of the above order does not appear to be feasible”.
Analysts say that for an economy in need of investments to sustain its growth rate, this is a dismal projection. More so, on the back of the fact that 2010-11 did not see a significant rise increase in investment expenditure either.
After seven years of double-digit annual growth in investment expenditures (between 18 and 70 percent) funded 90 percent through banks, 2010-11 was the first year when the figure grew by a paltry 5.3 percent.
Needless to mention that the RBI has been tightening domestic liquidity since February 2010, resulting in rising loan rates. While a slowdown in spending was to be expected, a decline in investment spends is so far not visible in related indicators.
For instance, during April-July 2011 period, the pace of capital goods production has softened to 7.3 percent, which is far softer than the average of over 23 percent growth in April-July 2010 period, but still does not indicate a shrinking capital goods production. Investments measured as a component of GDP too picked up pace in the first quarter of 2011-12, after remaining flat in the last quarter of 2010-11.
However, the capex spends envisaged by RBI are only in the context of private sector and it does not take into account government and household investments.