Has our economy’s investment cycle finally turned around?

Companies always say they will invest more in the future because they expect business to recover. This is a common thread in most quarterly investor presentations. These statements are often based on a desire or assumption that business conditions will improve. It’s hard for any CEO to say the opposite because it affects the company’s stock price. Therefore, statements made by companies should be interpreted with caution. They invest when they see a return on investment, but not when governments spend because they have to.

India’s gross fixed capital formation rate, which is linked to investment, is expected to improve from 29.2% to 29.8% of GDP this year. This is not very significant, this figure takes into account total investment, not just private industry, but it is certainly a positive indicator. Another piece of information on industrial performance shows that capital goods growth from April to November was stable at 7.6% against 14.8% in the previous financial year, as this is on a high base. Impressive despite the obvious slowdown. Meanwhile, the industry’s capacity utilization rate, based on RBI research, stood at 73.6% as of June 2023. Although based on a limited sample of companies, this level is not sufficient to warrant further investment. Depending on the strength of demand, it takes 78-80%.

Investment can be viewed from a financing perspective, as most capital formation is financed by the financial system. The corporate bond market is clearly a source of long-term funding. According to data from Center for Monitoring Indian Economy (CMIE), issuance till January is as follows: INR6.72 trillion yen was higher than last year. INR6.37 trillion. Although this looks encouraging, 80% was raised by financial companies (last year he was 74%).Therefore, non-financial companies just INR1.34 trillion. The first 10 months of stock issuance will be INR1.51 trillion more than last year INR1.11 trillion, which indicates investment activity. Bank credit growth so far through January 12 is slightly lower at 16.3%. However, data up to December shows that this has been mainly driven by personal loans, which rose 28.5%, and loans to the service sector (up 23%). Some comfort may be taken from the fact that credit growth to manufacturing is holding steady at 8.6%, about the same as last year. In fact, large industries that were lagging behind have maintained a steady growth rate of 7%, led by categories such as food processing, textiles, chemicals, and glass.

The foreign direct investment (FDI) situation is largely stable. Total inflows for the first eight months of this year were $47 billion, down from $49 billion last year. FDI is considered another driver of domestic investment as it leads to capital investment. External commercial borrowing (ECB) approvals for the current fiscal year also totaled $36 billion, up from about $20 billion in 2022-23 (ended December).

The overall picture is mixed. There are several signs supporting the crowd-in hypothesis. Fund flows are concentrated in sectors related to infrastructure. You can also look at investing in terms of intent. Therefore, the CMIE data captures a full range of new investment announcements. It could also be argued that if funds are being raised from anywhere for an investment, it does not need to be converted into an actual investment, but should be converted into a project declaration. Still, this data is worth looking at. His first three quarters of this year’s new investment announcements are: INRThe $12.89 trillion was the lowest in the past five years, excluding the COVID-19 period. Approximately 40% of this is from the aviation industry, where aircraft are procured, followed by electricity (26%), metals and machinery (11%), and chemicals (6%).

By putting all this data together, we can draw some conclusions. First, there is no clear picture to support such a view, so the investment is not far-reaching. Second, sectors related to government spending are definitely investing. Third, most of the funds come from internal resources, as the bond market and banking system do not show a sharp upward trend. Although it relies on foreign loans, the overwhelming majority are financial companies, especially state-owned enterprises. And a significant amount is being used to refinance. Finally, increasing capital investment will require a significant boost in consumption.

In conclusion, thanks to government policy promotion, private investment is showing signs of recovery, albeit sporadically. More momentum is needed, and this should hopefully happen in 2024-2025.

These are the author’s personal views.