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India Inc’s capacity expansion to slow: Morgan

business Updated: Aug 15, 2007 20:43 IST
BS Srinivasalu Reddy
BS Srinivasalu Reddy
Hindustan Times
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Domestic investment in capital expenditure, which has stayed above 20 per cent of the gross domestic product (GDP) during the three years till 2006-07, is expected to ease a bit in the next two years, raising questions whether the capital formation cycle has peaked by now.

Global financial services conglomerate Morgan Stanley said in a report that the reversal of the benign interest rate regime was likely to affect corporate fundraising, which, in turn, would ease their capital expenditure in 2007-08. The fall in the global risk appetite in the recent past would also add to their fundraising woes by 2008-09, it added.

“Capital expenditure as a percentage of GDP will decline marginally in 2007-08. However, we would expect capital expenditure as a percentage of GDP to decline significantly in 2008-09, if the recent sell-off of risky assets were to represent the beginning of a reversal in global risk-reduction trade,” said Morgan Stanley in a recent report on the Indian economy.

Morgan Stanley estimates the capital expenditure of India Inc for 2006-07 at 21.7 per cent of the GDP against 20.3 per cent the previous year. Official estimates on the latest figures usually come with a lag. <b1>

Drawing parallels to the two-three year capital expenditure cycles seen before and after March 1996, when the investment to GDP ratio peaked at 27.4 per cent from 23 per cent in 1992, the report said, “During that period, the capital expenditure cycle recovered sharply with the support of positive sentiment for emerging markets. However, it was soon constrained by tightening monetary policy, triggered by signs of overheating.”

“A simultaneous reversal in the risk appetite for emerging markets and reduced capital inflows caused further tightening in interest rates and affected the corporate sector’s ability to raise funds from international investors,” it added. The same is true in the present scenario, where real interest rates have gone up recently, along with curbs on external borrowings.

Though investment growth was strong, imbalances in capacity creation would remain the key challenge, the report warned. For example, Morgan Stanley estimated private corporate investments rose to 13.7 per cent of the GDP last year from 5.4 per cent in 2001-02, but that infrastructure investments remained low at 4.2 per cent of the GDP, albeit higher than the 3.5 per cent in 2001-02.