Sharp slowdown in project completions

by Mahesh Vyas

Projects worth Rs.764 billion were completed during the quarter that ended on March 31, 2020. This is very low compared to the Rs.4 trillion worth of completions that were scheduled for the quarter. It is less than a quarter of the expectation. It is likely that the information on project completions will improve in the coming months and the estimate of Rs.764 billion will rise. However, it would be nowhere close to the scheduled completions.

Revisions of the first estimates can be large. The first estimate is released immediately after the completion of the quarter. As a result, large revisions are possible. But these, at most, can lead to a 50 per cent increase in the initial estimate. They cannot lead to an over five-fold increase.

It is perhaps, safe to assume that project promoters decided to slowdown the implementation of projects and postpone their completions early in the quarter. This is not a Covid-19 outcome. The virus caused a disruption only in the last ten days of the quarter. Deferments of projects are likely to have happened earlier in response to disappointing business results and the deteriorating business environment.

Of the Rs.764 billion worth of completions in the quarter of March 2020, sixty-five per cent were completed in January 2020, 20 per cent in February and 15 per cent in March 2020. Usually, March shows a spurt in completions in response to the end of the fiscal year. However, this did not happen in March 2020.

Project promoters seem to have postponed project completions because the corporate sector’s financial performance in 2019-20 was exceptionally poor. All the first three quarters of the year saw inflation-adjusted sales decline in year-on-year comparisons. All the quarters also saw a similar decline in inflation-adjusted gross value added by companies. This sustained decline in performance and the worsening political climate following widespread protests against the Citizens Amendment Act, the National Population Register and the National Register of Citizens seem to have taken a toll on completion of investment projects.

Early in January 2020, based on available information, we had taken a call that project completions would accelerate in the last quarter. However, this does not seem to have been the case. On the contrary completions decelerated from the completions recorded in the quarter of December 2019 which stood at Rs.1.6 trillion.

Unlike our usual expectations of substantial revision in the first estimate of completions, we do not expect much revisions this time. The estimate of Rs.764 billion of completions in the March quarter is likely to be revised at most to Rs.1 trillion. Estimates of the first three quarters of the year are also likely to be revised upwards a little. As a result, the total completions during 2019-20 is likely to rise from the current estimate of Rs.4.1 trillion to Rs.4.6 trillion.

The current estimate of completions during 2019-20 at Rs.4.1 trillion is 37 per cent lower than the Rs.6.5 trillion worth of completions recorded in 2018-19. Even after the expected upward revision it would be 30 per cent lower than the 2018-19 record.

Completion of new investment projects is unable to cross the Rs.6.5 trillion barrier. In 2016-17, project completions had touched this level. But, these fell back to Rs.4.8 trillion in 2017-18. Then, it rose again to Rs.6.5 trillion in 2018-19 and was followed by a fall, back to a sub-five trillion completion record.

Only about two per cent of the total outstanding projects got commissioned during 2019-20. The fall in the completion rate to two per cent in 2019-20 is comparable to the level of 2013-14. Commissioning rates have improved since then. In the past four years, on an average, around three per cent of the outstanding projects get commissioned in a year. During these four years, the average value of all outstanding projects was around Rs.199 trillion. In comparison, the value of outstanding projects at the end of 2019-20 was lower at Rs.197 trillion. In spite of this fall in the pipeline of projects outstanding (the denominator), the proportion of completions declined sharply in 2019-20. Thus, the fall in the commissioning rate is bit more serious problem than is apparent from the estimate itself.

The pipeline of projects under implementation however has not shrunk. This rose from Rs.115 trillion in 2018-19 to Rs.117 trillion in 2019-20. And, completions as a per cent of projects under implementation fell to an all-time low of 3.5 per cent. Its worst record so far was at 4 per cent in 2013-14.

It is unlikely that these ratios would undergo major changes even after the expected revisions. Because as the revisions to completions increase the numerator, there could be revisions to new projects that could increase in denominator as well.

We do not expect project completions to pick up in 2020-21. This would be the year that would bear the brunt of the Coronavirus pandemic. The year has commenced with its first 15 day under a nationwide lockdown. We expect promoters to postpone the completion of projects on hand. In January 2020, we had projected a completion of Rs.5.9 trillion worth of projects in 2020-21. This is revised down to Rs.5.7 trillion.

References
1. https://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&tabcode=001101000000000000&repnum=2&frequency=Q&colno=1
2. https://economicoutlook.cmie.com/kommon/bin/sr.php?kall=wshreport&tabcode=001101000000000000&repnum=2&frequency=A&colno=1