Despite talk of economic recovery in the last two quarters of financial year 2020-21, the investment scenario remained dark. New investment projects during the fiscal saw a massive decline of 68 per cent year-on-year to Rs 5.18 lakh crore, according to a report by CARE Ratings. This was the lowest since FY05 when it was Rs 5.63 lakh crore.
In FY05, new investment projects had been on an increasing trend, rising up since FY03. Investment intentions have constantly remained above the Rs 10-lakh-crore level since FY06, with seven fiscal witnessing new investment projects worth more than Rs 20 lakh crore.
The sharp dip in FY21 can be attributed to nationwide lockdown imposed by the central government to curb the spread of COVID-19 pandemic. With state-wise lockdowns and restrictions to stop the second wave of the pandemic set to extend to June, recovery remains a far-fetched prospect, the ratings agency said. As several manufacturing businesses operating at partial capacity, given only essential goods can be consumed, a slowdown in recovery is probable.
"As there have been state-imposed lockdowns imposed this year for April and May which will extend to June for sure it does not look likely that there will be a significant recovery in investment in Q1 as June will also be a month with several restrictions on business," CARE Ratings said.
"While there have not been any overt restrictions put on ongoing construction activity, given the inability of companies to house all labour with the COVID protocol it does get challenging to maintain the pace of operations," it further added.
While the decline in new investments did come on the back of a black swan event like the pandemic, revival would squarely depend on an upsurge in demand, the ratings agency said. The lower level of investments announced also indicates that the increase in borrowing witnessed last year, which was subdued, was not for investment and could have been more for working capital as well as re-financing purposes, it further addded.
The decline in new investments was expected as government remained the main driver with limited private contributions. First there was surplus capacity with manufacturing and second there was uncertainty on the funding aspects, CARE Ratings said.
"There was a moratorium extended by banks for 6 months which came on the back of the system just about coming closer to normal after the NPA puzzle which started post the AQR policy of the RBI. Therefore there was some hesitancy for lending which can be evidenced from the limited success of the LTRO operations where most of the borrowed money was repaid by banks when the RBI permitted the same," the agency added.
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Investment remains an area of concern, the CARE report said, because the gross fixed capital formation rate has been declining continuously from 34.3 per cent in FY12 to 28.8 per cent in FY20 and is expected to go down further to 26.7 per cent in FY21.
The document also pointed out an interesting trend in new investment projects - contribution of government companies to the mix has been steadily declining, from 58 per cent in FY17 to 49 per cent in FY20 and 32 per cent in FY21.
On sector-wise new investments announced, the top 5 industries accounted for 65 per cent of total intentions in FY21, led by metals, electricity and chemicals, while power sector continued to be the major contributor to investment.
In FY21, 13 of the 19 industry groups registered an increase in share which was mainly due to a sharp dip for the transport services sector. IT sector specifically saw an increase in investment intentions as most companies turned to a work-from-home model during the pandemic, spurring demand in the segment.
Sectors like metals, power, IT and chemicals (which includes drugs and pharmaceuticals) to an extent will continue to witness momentum. But for investment to be generalised and not localised, overall consumption has to revive, CARE Ratings said.
"Infrastructure investment will also have to fructify on the private side and if the centre and state governments are able to expedite their plans, it would certainly have benefits through backward linkages," the agency further added.