Interest rates have fallen 5-6 per cent over the past couple of years, and firms are operating at near capacity in a large number of sectors, but corporate investment growth might be a while in coming.
For one, even the optimistic snap polls -- from the National Council of Applied Economic Research and Confederation of Indian Industry -- show that just around half the respondents plan to make fresh investments.
And while capacity utilisation is up from 65 per cent in September 1998 to nearly 90 now, NCAER's Business Expectations Survey shows there is still some slack in consumer durables and non-durables and even intermediates.
Adds credit rating firm Crisil's chief economist Subir Gokarn: "I think the notion of reaching capacity utilisation, and therefore needing to invest, is itself a dated notion -- with some minor investments, firms are able to expand capacity a great deal."
Indeed, even CII chief economist Omkar Goswami's cheery prediction may not be quite as rosy as it first seems -- "around 80 midcap firms alone will invest Rs 400 crore (Rs 4 billion) in the next 18 months".
That's Rs 20,000 crore (Rs 200 billion) a year from these corporates alone. While that is high, it is consistent with the Rs 130,000 crore (Rs 1,300 billion) or so levels of annual manufacturing sector investments that have been taking place in the last few years.
Goswami, however, adds that while he doesn't have a good sense of investments by the smaller firms, "a very big change from the past is that banks are so flush with cash, they're even willing to lend to B-1 rated firms."
A view corroborated by economist Surjit Bhalla who runs investment firm Oxus Fund Management: "Real interest rates have fallen 5-6 per cent over two years, and today companies can borrow at nominal rates ranging from 4-5 per cent abroad to 8 per cent in India. By the end of the next fiscal, manufacturing sector investment's share in the total investment will be up by a fairly significant 1-2 percentage points."
The truth, to cite that over-used cliche, lies somewhere in between Gokarn and Goswami. While the booming steel industry is collectively planning investments of over $1 billion over the next few years, there are no such big plans in the textiles/garments sector, which is poised to grow exponentially.
Chintan Parikh, chairman of the Indian Cotton Mills Federation and a leading textiles exporter, says he prefers to wait a while -- for starters, he just plans to divert domestic sales to the export market, and then study the profit margins.
So, investment patterns will clearly differ from one sector to another.
According to the NCAER's survey, almost all firms are running almost at more than optimum capacity in the capital goods sector -- 96 per cent of firms surveyed said they were running at optimum capacity.
For the non-durables sector, however, the figure was a manageable 84 per cent, and a not-alarming 89 per cent for the durables sector.
A vital factor in determining the pace of investments is going to be the pace of demand growth. According to data from the CMIE's Prowess database, firms that had a much higher growth in sales have had a much higher rate of investment.
Of the 7,939 listed companies in the database, only 154 have consistently had an annual sales growth of over 5 per cent since 1995-96, and there are just 75 firms whose sales consistently grew by over 10 per cent.
While the gross fixed assets rose 3.4 times in the period 1995-96 to 2001-02 for the firms that had a 5 per cent annual sales growth, they grew 7.2 times for the 10-per cent firms.
In contrast, investment grew just 1.8 times for all the 7,939 companies in the Prowess database. So, the pace of industrial growth will be vital. Data for the first quarter shows manufacturing growth is up to 6.4 per cent as against 3.8 in the same period last year.
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