Investments Declined In FY21—But How Big Was The Fall?

New project announcements in India for financial year 2020-21 fell to the lowest in at least 17 years, indicating how badly investments were hit due to the Covid-19 pandemic and subsequent lockdowns, according to CARE Ratings.

India saw new projects worth Rs 5.18 lakh crore being announced in FY21, the lowest since FY05, CARE said citing data from Centre for Monitoring Indian Economy. “In FY05 however, this level was a part of the increasing trend witnessed since FY03,” it said, adding new project announcements are a good indicator of investments.

The “disappointing” figure of investments can be primarily attributed to the lockdown imposed early in the pandemic to curb the spread of cases, the report said. This year, too, a recovery in investment is unlikely as many states have imposed lockdowns as a deadly second wave ravages through the country.

“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 said.

CARE said that for a revival in investments to take place, there would need to be a surge in demand as factories are still not running at full capacity. Besides, investment is a concern as India's gross fixed capital formation rate has been declining from 34.3% in FY12 to 28.8% in FY20 and is expected to fall further to 26.7% in FY21.

“The lower level of investments announced is also indicative of the fact 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,” CARE said.

Sectoral Shift

A trend that has been continuing since FY17 is how the share of government companies in new investments projects has been declining, CARE said. Until FY17, government companies dominated this mix with a 58% share. However, it fell to 49% in FY20 and 32% in FY21.

There has also been a shift in the sectors that have led the new investment charts. In FY20, power, transport, construction and real estate accounted for 72% of the total investments announced. In FY21, about 65% of the new announcements were from metals, electricity and chemicals. The informational technology sector also committed to higher spending mainly as a shift to work-from-home led to a demand for investment in the space, CARE said.

Sectors like metals, power, IT and chemicals will continue to see investment momentum, according to CARE.

“But for investment to be generalised and not localized, overall consumption has to revive,” the report said. “Infrastructure investment will also have to fructify on the private side and if the central and state governments are able to expedite their plans, it would certainly have benefits through backward linkages.”