New project proposals have declined significantly: CMIE

A CMIE report says that capex has come in really weak at the end of March 2012. Infact new projects announcements were down 9% quarter-on-quarter. There has been significant worsening of the new project announcements even from a year-on-year perspective.

In an interview to CNBC-TV18, Mahesh Vyas, managing director and chief executive officer of Centre for Monitoring the Indian Economy (CMIE) says, new project proposals have declined significantly. He further says, corporate capex is in a decline mode since one-and-a-half years. According to him, slow project execution and fuel availability are the key concern He even goes on to say that the 50 bps cut in rates will not turn sentiment around. Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video. Q: How alarming is the data at hand for you on capex? A: It’s not very alarming. I do see a fall in new proposals. This trend began about a year and half ago. Steadily and quite significantly the new proposals being made by corporate India or even by government have come down quite significantly. The March fall though can partly be attributed to elections, which were in several states, and many state governments could not announce any project, even if they had lined them up because of the elections around the corner. But that could be a minor reason why there was a significant fall in the quarter ended March. It is true that there has been a continuous fall in new investment proposals by all kind of institutions, but this is not alarming because there is a huge pipeline already of a lot of investment projects on hand. They are at various stages of implementation. There are issues to resolve regarding land acquisition, regarding coal, regarding gas and so on and so forth. So, I think the challenges are not so much in the fall in new investment as much as it is in the completion of the existing ones. Q: What gives you the confidence that this pipeline can actually lead to execution because between the planning and the execution has been the big slip from the private sector? A: That’s right. There is this big concern regarding implementation and there has been a slowing down of investment as well. The pipeline is very large. It’s about a Rs 100 lakh crore or Rs 100 trillion. Of this, we have seen a significant increase in the number of projects or the value of projects that’s got derailed, either they got abandoned or something to the effect. There has been a significant increase in this number also. So, it’s not only about new investments not coming in, but also about the existing ones getting completely abandoned. But my confidence nevertheless comes from the fact that there is very sharp increase, not a very sharp increase, but a sharp increase in the completion of projects. So, in the year ended March 2012, we have already seen investments worth about Rs 3.4 lakh crore getting commissioned. We expect this to go upto a little over Rs 4 lakh crore as new information keeps coming in. There is a little delay in the information coming in on this. So, it’s only by June-end when we will get the final number. Now Rs 4 lakh crore of investments getting commissioned in a year is the highest ever. So, in the year ended March 2012, we saw the highest commissioning of projects. In the previous year, this number was Rs 3.2 lakh crore and in the year before that it was Rs 3.8 lakh crore. These are numbers much higher than what we had seen earlier, which was nearly half of this Rs 2 lakh crore or so. So, there has been commissioning, which is not getting as much of attention as I think it deserves. Even going forward the number is quite healthy. _PAGEBREAK_ Q: How much of this decline in capex or sluggishness in capex is interest rate linked? The question that we have been asking people is whether 50 basis points is enough as an input to get to a lot more implementation going in the system. Do you think it’s enough? A: No, I don’t think so. I don’t think interest rates are as significant a factor. It certainly does improve the confidence or the broad sentiment in the economy, but critical issues are all around land acquisition and availability of coal, iron ore and gas. Those are the more critical issues. I don’t think interest rates are going to make that bigger difference in reality. Q: How are you reading the capital formation, the gross fixed capital formation data, which has slumped to about 6% now in the first nine months of FY12? Is that worrying you? A: The gross capital formation numbers as presented by the CSO is clearly worrying. But I also worry that this could be based on data which could be slightly weak. The capital goods production data is extremely volatile and that plays a significant role in the estimation of gross capital formation in the country. So, there has been a lot of concern over the quality of the data that goes into the making of the capital formation. So, I don’t think one can really make a strong or get a strong influence from these numbers. I would rather rely more on the CMIE capex numbers, which is known project by project, time to time we are tracking this very carefully we know this one. I think the capital formation seen from capex is not at all worrying. Q: What are your thoughts on inflation as well? A lot of what the RBI has said about future rate cuts yesterday was predicated on core inflation coming down and continue to remain subdued. Given what is blowing in the economy at that point, the level of suppressed inflation, is it your fear that in the next three-four months inflation might start inching higher or do you think it will be supportive to more rate cuts? A: We are in times where inflation can be expected to remain high. I don’t have much hopes in the inflation rates coming down or even remaining where they are. The expectation is that there is a significant possibility of inflation inching up a wee bit, not too much. There are too many factors around the corner that can raise inflation rates again. So, I am not at all considering a significant fall in inflation. Now, will this raise interest rates? Will it kind of induce the Reserve Bank of India to raise interest rates? That’s difficult to say. I don’t think it’s easy to predict that one. I only can say that I hope that it is well understood by now that increasing interest rates don’t actually control inflation.