Investments grow, with some govt help

Experts say private sector investments will pick up soon

Investments grew after a gap of three quarters, driven by the government, while demand contracted for the third consecutive quarter during October-december (Q3) of financial year 2020-21 (FY21).

Even then, investments remained subdued, growing by a marginal 2.56 per cent in Q3FY21. It had started declining even before the pandemic started impacting India’s economy.

Gross fixed capital formation (GFCF) contracted by 6.48 per cent in Q4FY20. It plunged in Q1FY21 before returning to earlier levels in Q2.

Madan Sabnavis, chief economist at CARE Ratings, said investments in Q3 were driven purely by the government. This is backed up by the data from the Centre for Monitoring Indian Economy (CMIE), which showed that investments in new projects declined to ~0.91 trillion in Q3, compared with ~1.15 in Q2.

However, Devendra Pant, chief economist at India Ratings, said there was a mix of private and the government sector investments in some sectors such as pharma and information technology.

Investment activity reverted to growth, supported by high levels of public investment spending, said Rahul Bajoria, chief economist at Barclays India.

Driven by huge contraction in the first two quarters, investments were projected to decline by over 12 per cent in the current fiscal by the second advance estimates, against a 5.44 per cent growth the previous year.

Pant said the Centre’s capex grew by 35 per cent to ~3.62 trillion in the first 10 months of the current fiscal, against ~2.68 trillion the previous year. However, state governments’ capex remained compressed, he added.

Sabnavis said core sector data substantiates the point that investments in the private sector remained subdued. He said even construction-related investments were not picking up, as seen by the fact that cement production declined for the third consecutive month in January by six per cent, he said. Despite festive and pent-up demand, private final consumption expenditure declined, albeit at a much slower pace of 2.4 per cent in Q3, compare with more than 11 per cent contraction in Q2, and over 26 per cent fall in Q1.

Pant said demand remained suppressed as many jobs were shed and people are feeling the pinch of salary cuts.

Sanjay Kumar, CEO and MD, Elior India, said the next quarter will be crucial to assess if private investments and consumption are picking up.

The second advance estimates predicted that the economy would contract by over one per cent in Q4. However, Pant said once the quarterly figures for FY20 are revised, actual GDP data would show a moderate growth in Q4 of the current fiscal.

Sabnavis believes that private sector investments will slowly pickup from the second half of the next financial year.

Pant said demand will gradually grow in the next fiscal, as the economy is poised for double-digit growth.