Is it time to invest?

WELL, THE southwest monsoon has been bountiful. The kharif crop this year should be a bumper one, putting a lot of spending money into the rural sector. The low interest rates on housing loans and a massive expansion of organised retail outlets have triggered a boom in construction. Commodity prices have made a comeback from 50-year lows.

The Government has initiated large cross-country highways development projects. There is talk of putting in place an extensive nationwide gas supply grid. Coal mining is being thrown open to the private sector. Reforms in the power sector are beginning to be implemented, reviving an interest in power generation projects.

The U.S. and Japanese economies are showing signs of revival. Exports of engineering goods and pharmaceuticals are soaring. The GDP is likely to grow at 6.5 per cent and more.

So, is it time for the corporate sector to invest in fresh capacity? An interesting question, considering that the last wave of big ticket corporate investment took place in the early and mid-1990s, following the promise shown by the first burst of economic liberalisation. That promise proved to be a mirage, particularly in the power and steel sectors. Compounding this was the extended stagnation in the global economy. Indian banks, financial institutions and equity investors have still to recover from the deep negative returns on that wave of corporate investment. The entrepreneurs who ventured into deep waters in those days have today become experts in keeping afloat by debt restructuring. Once bitten, twice shy is an old adage and was evident in a recent discussion on the current investment scenario in the country organised by CNBC-TV 18 in Bangalore.

The corporate participants from the manufacturing sector were a mixed lot: the CMD of an Indian electrical equipment manufacturing company which is in the doldrums, the vice chairman of a consumer electronics MNC which has been closing down many of its Indian manufacturing units, the VC and MD of a global electrical engineering giant whose Indian component and sub-systems manufacturing operations are minting money now and the MD of an Indian watch making company which is taking its brand abroad.

The sum and substance of what they had to say was simply this: sure there will be plenty of demand growth in the near future; however, there are too many "ifs and buts'' in the oncoming economic scenario which warrant extreme caution in investing in green-field expansions. The doubts about sustained growth in demand come from political uncertainties (plenty of elections due in the next one year), on-again/off-again policies on privatisation of public sector companies, the ballooning fiscal deficit in India due to subsidies galore, continued stagnation in the economies of E.U. majors like Germany and France and the persistence of terrorism across the globe.

True, the demand for goods and services in India has been growing quite strongly in the past two years. But is the growth so strong and consistent as to warrant investment in fresh capacity? "Not yet" was the view of the participants.

In the consumer durables sector, for example, a sustained demand growth of 15 to 16 per cent over 6 to 8 quarters could spur manufacturers to consider investment in capacity expansion.

The demand growth in the last year has been only half of this and there is considerable unutilised capacity in this sector.

In the last couple of years, the capacity utilisation of most of the industries CRISIL tacks has increased from 50-60 per cent to 70-75 per cent, with only a few reaching 85 per cent. So, there is still a lot of slack to be tightened.

Manufacturing companies realise this and have shied away from creating new capacities. Banks are today flush with funds with few corporate term borrowers, despite the low interest rates on commercial loans.

The credit deposit ratio for all scheduled commercial banks was 62.3 as on March 2002 and only 59.4 as on March 2003. In the past couple of years, most companies have been preoccupied with only one goal — reduce debt and shore up the bottomline.

Most corporate investment has gone into upgrading technology, improving productivity, lowering costs, enhancing quality, reducing specific, energy consumption, brand building, incorporating information technology and the like. Lean and mean is the new corporate mantra.

Much of this has been accomplished through imports of the latest capital equipment and technology. A survey by a financial daily shows that imports of capital goods have gone up from $5.74 billion in 2000-01 to $7.71 billion in 2002-03 and the share of capital goods in total imports has gone up in the same period from 11.48 per cent to 12.56 per cent. Merger and acquisition (M & A) activity is another area where considerable corporate investment has been channelled of late. In fact, one of the fundamental weaknesses of Indian industry has been excessive fragmentation of capacity and consolidation to better face global competition will be a continuing trend in the future. For example, the top five cement producers had 15 per cent of the total capacity in 1985.

Today their share is 65 per cent. More such consolidation will be seen in the near future in sectors such as pharmaceuticals, foundries, apparel and the like. Fresh investments in capacity expansion have been mostly restricted to brown-field expansion, like in the steel sector.

Spending money on new plants is low in the priority list, except for high flyers like the two-wheeler sector. It is a sign of the times that, of late, the Indian corporate sector is more keen on making fresh manufacturing investments in China than in India itself. But that is another story.

N. N. Sachitanand

in Bangalore

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