Context: A recently released RBI study on Private Corporate Investment in 2018-19 highlights that private corporate investment plans have fallen for the seventh year in a row.
Mains: GS III-
- Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
- Investment models.
Capital expenditure of the private corporate the sector is a key driver of the investment climate in the economy and an indication of the ‘animal spirits’ that influence entrepreneurial energies and business sentiment.
What Are Capital Expenditures- CapEx?
- Capital expenditures, commonly known as CapEx, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, an industrial plant, technology, or equipment.
- CapEx is often used to undertake new projects or investments by the firm.
- Making capital expenditures on fixed assets can include everything from repairing a roof to building, to purchasing a piece of equipment, to building a brand new factory.
- This type of financial outlay is also made by companies to maintain or increase the scope of their operations.
- Put differently, CapEx is any type of expense that a company capitalizes, or shows on its balance sheet as an investment, rather than on its income statement as an expenditure.
RBI Study on Private Corporate Investment in 2018-19
Introduction and Methodology
- As the information on CapEx from published annual accounts of companies is available with a considerable time lag, a cross-country best practice is to generate corporate investment forecasts on the basis of surveys of investment intentions and other relevant factors such as capacity utilisation and demand indicators.
- India has also been a forerunner in this international experience, with surveys, attempted since the late 1980s to assess and forecast investment intentions.
- Since 1978, the Reserve Bank of India has been providing an outlook on investment intentions.
- In essence, data on investment intentions are obtained from the financiers’ side – the banking sector and financial institutions (FIs) as well as external commercial borrowings (ECBs), foreign currency convertible bonds (FCCBs) and initial public offerings (IPOs), follow-on public offerings (FPOs), and rights issues for a year.
- The short term (one year ahead) forecasting of CapEx based on time phasing of corporate projects financed by financial institutions was pioneered by Dr C. Rangarajan in 1970.
- Under this methodology, an estimate of the likely level of CapEx that would have been made during the year is obtained, based on ex-ante phasing plans furnished by the companies at the time of appraisal.
- It is ensured that each project enters the information set only once even if it is financed through more than one channel.
- Projects not financed through any of the above-mentioned channels or of size lower than 100 million are not covered.
- Projects with private ownership below 51% or undertaken by trusts, Central and State Governments, and educational institutions are also excluded.
- It is to be noted is that it is assumed that companies adhere to their ex-ante (before the event) expenditure plans.
- Consequently, there is the possibility that some ex-ante intentions do not fructify into realised investment.
- This study extends the tradition by estimating CapEx by the private corporate sector during 2017-18 and 2018-19.
- In doing so, it also explores the relationship between envisaged CapEx (based on project plans) and the realised CapEx (as available in the national accounts).
Key Outcomes of the Study
- Proposals of 490 projects with a total cost of 1,728 billion were sanctioned by banks and FIs during 2017-18.
- In addition, ECBs/ FCCBs to the tune of 247 billion were contracted by 292 companies in that year.
- Furthermore, 51 companies did not avail of financing from banks and FIs but raised 16 billion for their CapEx needs through domestic equity issues.
- Altogether, 833 companies made investment plans during 2017-18, aggregating 1,991 billion, as against 916 companies with investment intentions totalling 2,028 billion in 2016-17.
- Industry-wise, chemical and chemical products industries accounted for 11% of the total cost of projects in 2017-18, a significant rise over its quinquennial average (during 2012-13 to 2016-17) of 1.7%.
- The share of the construction sector decreased to 5.1% in 2017-18 from 12% in 2016-17, indicating lacklustre activity in the sector.
- Within the infrastructure sector, the power sector continued to dominate, although its share dipped from 2016-17 (45.4%) and quinquennial average (43.8%) levels.
- The lower number of the power sector projects sanctioned in 2017-18 also led to a contraction in its share in the total cost of projects.
- The total cost of projects sanctioned in a year tends to be driven by the presence of mega projects which generally run over a longer span of time, as reflected in their phasing profile.
- There were 44 high-value projects (~10 billion-50 billion), with a share of 44.1% in the total project cost.
- The size-wise distribution of the projects accorded financial sanction by banks/FIs shows a decrease (from five in 2016-17 to three in 2017-18) in the number of mega projects (50 billion and above); however, there was a marginal increase in their share in total project cost (from 17.4% in 2016-17 to 18.6% in 2017-18).
- The ticket size (average cost of the project) of megaprojects rose in 2016-17 and 2017-18 from a trough in 2015-16.
- Statewise Distribution of Projects:
- The location of a project is typically selected on the basis of factors such as accessibility of raw materials, availability of skilled labour, adequate infrastructure, market size, and growth prospects.
- Over the last five years (2013-14 to 2017-18), 68% of the projects were taken up in Maharashtra, Gujarat, Andhra Pradesh, Karnataka, Odisha, Chhattisgarh, Tamil Nadu and Madhya Pradesh.
- Maharashtra also accounted for the highest share (22.6%) in terms of the total cost of projects sanctioned by banks/FIs in 2017-18 followed by Karnataka, Andhra Pradesh, Gujarat, Tamil Nadu, Rajasthan and Chhattisgarh in that order.
- Gujarat recorded a fall in its share from the previous year.
- The share of ‘multi-state’ projects has declined in the recent period, probably reflecting the bottlenecks in obtaining clearances from multiple authorities.
- Investment in new projects occupied the largest share (89.3%) in the total cost of projects sanctioned by banks and FIs.
- Expansion and modernisation constituted 9.2% of the total project cost.
- The phasing profile of CapEx of projects sanctioned by banks/FIs indicates that around 38% (650 billion) of the total proposed expenditure would be spent in 2017-18, 24% (419 billion) in 2018-19 and 21% (368 billion) in the year beyond.
- Around 17% of the total cost of projects sanctioned in 2017-18 was spent during 2014-15 to 2016-17.
- From the planned expenditure, the aggregate CapEx envisaged in 2017-18 showed a marginal decrease over the previous year partly due to a decrease in sanctions by banks/FIs.
- In 2017-18, CapEx planned to be incurred from resources raised from international bond markets declined by 7% from its level a year ago.
- The capital market (equity route) enabled the financing of envisaged CapEx of 19 billion in 2017-18, which was significantly lower than in the previous year.
- In sum, it is assessed that a total CapEx of 1,487 billion would have been incurred by the private corporate sector in 2017-18, of which 802 billion was from fresh sanctions during the year.
- The year marked the seventh successive annual contraction in the private corporate sector’s CapEx plans.
- However, the envisaged CapEx from the pipeline projects already undertaken showed an improvement over the previous year’s pipeline.
- On the basis of the pipeline projects sanctioned in preceding years, the planned CapEx could amount to 792 billion in 2018-19, marking an improvement over the previous year (685 billion).
- Going forward, the level of corporate investment in 2018-19 from the new cohort of projects getting sanctioned in 2018-19 will also influence the aggregate CapEx for this year.
- In the first half of 2018-19, 190 projects with a total cost of 914 billion were sanctioned by banks/FIs.
- A total of 451 investment proposals aggregating 1,158 billion were sanctioned through the three channels of finance (viz. Banks/FIs, ECBs/FCCBs/RDBs and IPOs).
Corporate Investment Financed by Private Placements and Foreign Direct Investment:
- In recent years, debt instruments like bonds and debentures and foreign direct investment (FDI) have assumed prominence as alternative sources of CapEx financing.
- Mobilisation of funds through the private placement of debt (bonds and debentures) rose substantially during the period from 2013-14 to 2016-17 but moderated in 2017-18 and H1:2018-19.
- Similarly, FDI inflows, which witnessed a consistent increase during the period, dipped marginally in 2017-18 and H1:2018-19.
A Time Series Analysis of Envisaged Investment
- The one-year ahead forecasts of envisaged CapEx and realised investment in terms of gross fixed capital formation (GFCF) of the private sector in the national account statistics for the period 1991-92 to 2017-18 exhibit divergence for select periods, particularly in some recent years.
- However, there appears to be a co-movement in these two series in the longer horizon.
- The model used by the RBI reveals a long-run relationship between envisaged investment and realised investment of the private corporate sector, which is consistent with the evidence in the literature.
- The analysis presented in this article points to a long term association between envisaged CapEx obtained from project implementation plans and realised investment.
Thus, these investment intentions provide useful insights into the overall direction of CapEx.
- The projects sanctioned in the first half of 2018-19, together with the pipeline projects already undertaken, show some recovery in the CapEx cycle.
- Going forward, investment activity is expected to gather pace, benefitting from the pipeline projects lined up by private corporates.
- A revival in the investment cycle could be underway in the medium term, as revealed in these investment plans.
- Recent efforts to strengthen balance sheets of both corporates and the banking sector should provide a conducive environment for a pick-up in capital formation.
- Improved capacity utilisation and business expectations in the first quarter of 2018-19 polled by various surveys are providing a lead indication of a reinvigoration of investment activity in the Indian economy in the period ahead.