Is Investment Cycle Revival Around The Corner?

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One of the major reasons why India has not been able to achieve the growth potential is the delay in setting up of infrastructure. Most of the slowdown here is due to the stalled projects that have been increasing due to the lack of proper policies, delays, hassles and other such issues.

There were huge expectations from Modi Government in this regard. It's been almost 2 years since the new Government came to power. So how has this Government performed? Have things really improved on this front?

Let's answer this using some data points that the CMIE has to offer.

As reported, the March 2016 quarter witnessed new investments of Rs 2.6 trillion in capital expenditure. This was higher than the preceding quarter and the corresponding quarter a year ago. Not only that, this number stood higher than the average of the last four quarters.

The number of projects revived during the quarter also surpassed that of preceding quarter and corresponding quarter a year ago.

Further, the value of projects abandoned during the quarter fell to Rs 0.03 trillion, down 40% quarter on quarter (QoQ) and down 56% year on year (YoY).

Moreover, stalled projects during the quarter stood at Rs 0.4 trillion. This too was recorded lower than the levels seen in the preceding quarter and in the year-ago quarter.

So, on the basis of these numbers, can one claim that the investment climate in infrastructure space has finally got its wings?

We think that it would be too early to conclude that. This is because there are factors that need to be considered before accepting the above numbers on the face value.

If one digs a little deeper it can be found that a large part of the new investment proposal in the March 2016 quarter were initiated because of investment conclaves organized by a record number of state governments.

Also, as CMIE reports, 'While projects revived have increased substantially in the past two years, this increase does not show in projects completed. Rs 2 trillion worth projects were revived during 2014-15 and another Rs1 trillion were revived during 2015-16. However, projects completed in 2015-16 increased by only Rs.0.25 trillion.'

Hence, while the latest quarter does look better, one has reasons to be skeptical in this regard.

For a sustainable recovery in capex cycle, the government will need to ensure that there are no more hurdles in ramping up infrastructure. This would be critical in ensuring a sustained high GDP growth for the country in the longer term. Given the surplus capacity and low demand, the wait for an investment revival is likely to take longer. In the meantime, we believe investors should stop speculating on such broader themes and focus on bottom up approach of stock selection.

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