GFCF to contract by 2% in 2016-17

Demonetisation damages recovery prospects

by Mahesh Vyas

We expect gross fixed capital formation (GFCF) to decline by two per cent in 2016-17 after having grown by 4.9 and 3.9 per cent in the past two years. This would be the first instance of a fall in GFCF at least in the last one decade.

The growth in GFCF slowed down since 2012-13. In the first year, uncertainties related to fuel supplies (coal and gas), supreme court restrictions on iron ore mining, bottlenecks caused by lack of timely environmental and non-environmental clearance decisions and land acquisition related problems had stalled the investment momentum that began in 2004. These problems were resolved to a large extent during 2013-14. But, investments have continued to remain anemic. The wild enthusiasm of private investors displaying eagerness to create new capacities has been missing now for nearly five years.

Low demand is principal reason why investments have stalled. Investors have lost interest, temporarily, in the projects they were pursuing. They often site "unfavourable market conditions" as the reason for stalling the implementation of projects. This "unfavourable market condition" is, in fact, lack of sufficient demand. This is borne by the fact that according to RBI’s OBICUS survey, capacity utilisation has dropped gradually to 73 per cent as of June 2016 from 83 per cent in March 2011.

Low capacity utilisation and lack of investor enthusiasm show that entrepreneurs did not see bright business prospects in the near future. Demonetisation has further damaged the prevailing bleak investment prospects. Consumer demand has fallen and liquidity is constrained. Entrepreneurs also face a business environment where the government talks of raids and punitive actions. While these intentions could be good, the effect could be increased litigation and depressed demand.

Apparently, there is no dearth of funds for investments. Banks are flush with funds but, credit growth is very poor. As more new currency notes are introduced, some of the deposits with banks will reduce as people who cannot get cash today will start withdrawing it successfully when the cash becomes available. Thus, banks will be less flush with funds towards the end of 2017. It is likely that their NPAs will rise because of demonetisation. The government has already announced a relaxation of repayment of loans. The flood of cash notwithstanding, banks’ balance sheets are stressed with large NPAs and their ability to lend aggressively still remains constrained. In fact, the banks’ financial position is somewhat messed because of demonetisation.

Therefore, an investment environment that was already plagued with poor demand and low capacity utilisation is now infested with fears of a further depression in demand, prospects of inspections and raids and a somewhat messed up banking system.

Investors are likely to wait for demand to be restored, supply chains to be repaired, the spectre of raids to go away and banks to return to normalcy before they display any enthusiasm regarding the creation new capacities.

In the current circumstances, investments can pick up only in government supported infrastructure creation. The fiscal space for this would have to be created. But, that the choices are limited. It is unlikely that the government will chose the path of aggressive deficit financing or raise taxes to drive investments. It is therefore more likely that investments will remain weak in the coming five years.

CMIE STATISTICS
Unemployment Rate
Per cent
6.2 -0.0
Consumer Sentiments Index
Base September-December 2015
93.5 0.0
Consumer Expectations Index
Base September-December 2015
93.9 0.0
Current Economic Conditions Index
Base September-December 2015
92.8 0.0
Quarterly CapeEx Aggregates
(Rs.trillion) Jun 17 Sep 17 Dec 17 Mar 18
New projects 2.33 1.38 1.24 2.15
Completed projects 0.87 1.21 1.02 1.07
Stalled projects 2.67 0.69 0.93 3.34
Revived projects 0.30 0.34 0.23 0.14
Implementation stalled projects 0.73 0.72 0.58 1.05
Updated on: 25 Apr 2018 9:20AM
Quarterly Financials of Listed Companies
(% change) Jun 17 Sep 17 Dec 17 Mar 18
All listed Companies
 Income 9.6 7.9 11.9 7.6
 Expenses 9.9 9.0 12.9 8.0
 Net profit -19.9 -18.1 -13.9 6.6
 PAT margin (%) 5.3 5.5 4.9 15.2
 Count of Cos. 4,482 4,469 4,431 78
Non-financial Companies
 Income 10.2 8.2 13.2 3.0
 Expenses 10.5 8.2 12.3 4.0
 Net profit -25.1 -6.0 12.7 -1.8
 PAT margin (%) 5.2 6.2 6.4 14.0
 Net fixed assets 9.2 5.3
 Current assets 78.7 9.6
 Current liabilities 11.0 24.5
 Borrowings 10.4 -2.5
 Reserves & surplus 5.2 0.3
 Count of Cos. 3,459 3,442 3,427 55
Numbers are net of P&E
Updated on: 25 Apr 2018 9:20AM
Annual Financials of All Companies
(% change) FY15 FY16 FY17 FY18
All Companies
 Income 5.5 1.5 5.1 1.6
 Expenses 5.6 1.7 5.1 0.7
 Net profit 0.0 -10.3 23.7 9.2
 PAT margin (%) 3.1 2.8 3.6 8.3
 Assets 9.5 10.0 6.9 3.3
 Net worth 8.5 11.4 6.0 2.8
 RONW (%) 5.8 4.9 5.9 12.7
 Count of Cos. 25,647 23,668 20,755 19
Non-financial Companies
 Income 4.7 0.6 4.7 1.5
 Expenses 4.9 0.0 5.2 0.6
 Net profit -8.6 18.4 18.0 10.7
 PAT margin (%) 2.0 2.5 3.1 7.4
 Net fixed assets 13.3 17.3 5.4 4.4
 Net worth 6.9 12.0 4.4 2.9
 RONW (%) 4.6 5.1 6.0 11.5
 Debt / Equity (times) 1.1 1.1 1.0 0.2
 Interest cover (times) 1.9 1.9 2.1 11.8
 Net working capital cycle (days) 66 65 62 38
 Count of Cos. 20,897 19,807 17,287 17
Numbers are net of P&E
Updated on: 18 Apr 2018 11:50AM

Time series available from 1990 onwards