Upping govt spending can't revive investments: Ind-Ra

11 Oct 2017

Muted demand and high leverage will ensure that a recovery in investment cycle does not happen before FY20, and government efforts on this by upping spends will also be ineffective, a report said on Wednesday.
"The broadbased recovery in the investment cycle is only expected to happen after FY20 as per our base case estimates due to moderate consumption demand outlook, weak pace of nominal growth recovery and global over capacity," domestic ratings agency India Ratings said.
The agency, a unit of global ratings agency Fitch, added that the corporates will shy away from investments despite the prevailing low interest rates.
Growth in gross fixed capital formation, which is a proxy for gauging investments, is also declining, the agency said, pointing out that it decelerated to 3 per cent in Q1FY18 as against 6 per cent in FY16.
Even as the government spending was up during FY16-17, there was a decline in the gross fixed capital formation in the same years, and the number has come down till 27.5 per cent in Q1FY18, it said.
"If private corporate spending in manufacturing or infra continues to deteriorate, it may have a moderating impact on the gross fixed capital formation," it warned.
It is essential for the overall capacity utilisation to go up to 85-90 per cent from the current 65-70 per cent for corporates to start spending, it said, adding this is unlikely in the next two years.
It can be noted that a decline in private investments is one of the major factors attributed to a decline in overall economic growth, which slipped to a three-year low of 5.7 per cent for the April-June quarter this year.
Release of the official data has also led to a rash of sharp cuts in growth estimates by the Reserve Bank of India, and also multilateral institutions like the IMF.
The government is mulling to revive economic fortunes through measures, which may include a stimulus. However, the agency raised doubts over the government efforts being effective in upping investments.
"Despite the higher government spending due to incremental revenues on account of GST, we believe government spending alone will have limited ability to revive the overall investment cycle unless there is a revival in corporate capex performance," it said. (PTI)