The article attempts to capture growth of fixed capital investment in the private corporate sector in 2004-05 based on the projects sanctioned assistance by banks and financial institutions during 2004-05 and the previous years. The total project cost as well as the average cost of projects went up significantly in 2004-05, reflecting increased investment opportunities. As in the previous year, the infrastructure projects continued to dominate the scene. Upsurge in metals and metal products projects was also noticeable in 2004-05. The sharp increase in production of capital goods, import of capital goods and other non-oil imports and envisaged capacity accretion supported by low interest rates, improved corporate profitability and robust GDP growth in manufacturing over the quarters in 2004-05 point to the continued momentum in fixed capital investment in 2004-05. The climate for fixed capital investment appears to be conducive during 2005-06.

Capital investment is essential for modernisation of productive capacity and adding new capacity for current and future industrial growth. The objective of the article is to make an assessment of capital investment in the private corporate sector, which would provide important insights into the business expectations about performance of economy in general, and the infrastructure and manufacturing sectors in particular¹.

With this objective in view, the study is designed to capture the likely growth of corporate investment based on data on phasing details of projects sanctioned assistance by the commercial banks and the major all-India financial institutions. The approach adopted is based on the methodology developed by Dr. C. Rangarajan in an article captioned "Forecasting Capital Expenditure in the Corporate Sector" published in the December 13, 1970 issue of the ‘Economic and Political Weekly’.

The private corporate entities undertaking large projects, generally approach the banks and the term-lending institutions for financing the project cost. The yearly phasing details of capital expenditure available in the relevant project reports with banks and non-bank financial institutions constitute an important source of information on corporate fixed investments. The envisaged phasing details are the basic inputs for estimating likely growth in capital expenditure.

The estimation of the growth in capital investment in this study is based on the projects in the private corporate sector, which are assisted by public sector commercial banks and term-lending institutions. Some companies may raise resources exclusively from capital market to undertake large projects, without seeking any assistance from the banks or term-lending institutions. It is difficult to get the phasing details of capital expenditures from the prospectus issued by such companies. At the same time, there is no reliable information on the end-use of funds raised from the markets. Such projects are excluded from the purview of the study.

The present study covers projects assisted by Industrial Development Bank of India (IDBI), ICICI Bank, Infrastructure Development Finance Company (IDFC) and Infrastructure Leasing & Financial Services Limited (ILFS) and public sector banks during 2004-05, and also covers all the projects that have been sanctioned assistance prior to 2004-05 that have capital expenditure lined up in 2004-05. During 2004-05, these institutions provided financial assistance to 722 projects with an aggregate envisaged cost of Rs. 97,270 crore.

*Prepared in the Corporate Studies Division of the Department of Statistical Analysis and Computer Services.

1The previous study 'Corporate Investment: Growth in 2003-04 and Prospects for 2004-05' was published in the November 2004 issue of the RBI Bulletin.

The estimated corporate investment in the year 2004-05 has been worked out by suitably aggregating the data on the time phasing of capital expenditures over the individual years for the duration of projects. For this purpose, all the corporate projects, which have been sanctioned financial assistance by the banks and financial institutions in 2004-05 and in the previous years were considered.

In cases where a company approached more than one institution for project assistance, care was taken to avoid double counting in the compilation. Efforts were made to incorporate the revisions in the phasing of projects sanctioned earlier, to the extent possible. The data consolidated on these lines, are presented in Table 1. When horizontally read, it shows the capital expenditure that are expected to be incurred in various years on the projects for which assistance was sanctioned in a given year. Vertically read, it shows the capital expenditure that are expected to be incurred in a year on the projects which were assisted in that year and in previous years.

Apart from the project expenditures, the companies also report the normal capital expenditure likely to be incurred in subsequent years. These expenditures are added to the project expenditures so as to obtain total capital expenditure planned by the private corporate sector.

Capital expenditure of Rs. 32,101 crore w ere expected to have been incurred during 2004-05 in respect of projects sanctioned up to 2003-04 (col. 12, Table 1). The projects sanctioned assistance during 2004-05 envisaged capital expenditure of Rs.37,039 crore in 2004-05. Thus, the total capital expenditure that might have been incurred during 2004-05, amounted to Rs. 69,140 crore. Further, a few projects sanctioned assistance in 2004-05, were found to have planned capital expenditure to the tune of Rs. 5,942 crore in 2003-04. Thus, the total capital expenditure invisaged to be incurred during 2003-04 works out to Rs. 49,157 crore. Therefore, the capital expenditure planned by the private corporate sector during 2004-05 is likely to have risen by 40.6 per cent as compared with the rise of 17.7 per cent in 2003-04.

Table 1 : Phasing of Capital Expenditure of Projects Sanctioned Assistance by Commercial Banks and Term Lending Institutions

This study covers 722 corporate projects assisted by term-lending institutions and commercial banks during 2004-05 and their aggregate cost of projects amounted to Rs. 97,270 crore, spread over seven year period spanning from 2003-04 to 2009-10. In 2003-04, 591 projects were covered and had an aggregate projects’ costs of Rs. 72,940 crore (Table 2). The normal capital expenditure of the 722 projects amounted to Rs.131 crore phased out over the period of five years from 2003-04 to 2007-08. The total fixed capital expenditure of these projects amounted to Rs. 97,401 crore. The phasing details of the projects sanctioned during 2004-05, showed that 38.0 per cent of the total fixed capital expenditure amounting to Rs. 37,000 crore is planned to be incurred in the year of sanction and another 34.7 per cent (Rs. 33,742 crore) in the following year 2005-06. The share of capital expenditure in the year preceding the year of sanction was lower at 6.1 per cent.

The industrial classification of projects adopted for this study is based on the industrial activity as indicated in the project reports. The three major industry groups, viz., infrastructure, engineering and chemicals together accounted for 66.5 per cent of the total cost of projects in 2004-05 as compared with 78.1 per cent in the previous year. Infrastructure projects accounted for a substantial share of 33.5 per cent in the aggregate cost of projects in 2004-05; the share was, however, lower when compared with that of 56.5 per cent in 2003-04. The share of telecom sector declined significantly to 16.3 per cent in 2004-05 (39.3 per cent in 2003-04), whereas that of power sector increased marginally to 14.1 per cent in 2004-05 from 13.2 per cent in the previous year (Table 3) (Chart 1).

The share of engineering industry in the aggregate cost of projects substantially increased from 19.5 per cent in 2003-04 to 30.1 per cent in 2004-05. The Project cost of chemical industry accounted for 2.9 per cent of the aggregate cost of projects in 2004-05 (2.1 per cent in 2003-04). Project expenditure in metals and metal products and textiles increased significantly vis-à-vis corresponding expenditure in 2003-04. Among industries, which accounted for 2 per cent to 5 per cent of the total cost of the projects in 2004-05 were services (hospitals, transport and entertainment) (4.3 per cent), cement (3.7 per cent), paper and paper products (2.4 per cent), minerals (2.3 per cent) and hotels (2.3 per cent).

Table 2 : Phased Project and Normal Capital Expenditure of Projects Sanctioned in 2003-04 and 2004-05

Very large projects, each with a project cost of Rs.500 crore and above, numbering 36 accounted for 59.3 per cent of the total cost of projects in 2004-05 (Table 4). The aggregate cost of these projects worked out to Rs. 57,714 crore. In 2003-04, 20 such projects (aggregate cost of Rs. 48,887 crore) accounted for 67.0 per cent of total cost of all projects.

The state-wise classification of projects is based on the location of the projects as stated in the project reports.

There were 33 projects that are located in more than one state (presented in the category multiple

Table 4: Size-wise Distribution of Projects and their Cost in 2003-04 and 2004-05

State-wise, Maharashtra occupied the top position with an aggregate cost of projects at Rs. 11,927 crore accounting for 12.3 per cent of the total cost of projects in 2004-05 followed by Gujarat (11.3 per cent), Tamil Nadu (10.2 per cent), Chhattisgarh (10.2 per cent) and Orissa (9.5 per cent) (Chart 2).

Table 5: State-wise Distribution of Projects and their Cost During 2003-04 and 2004-05

New projects, numbering 344, with a total cost of projects at Rs. 40,829 crore, accounted for 42.0 per cent of the aggregate envisaged cost of projects in 2004-05 (in 2003-04, there were 322 such projects with a share of 65.0 per cent) (Table 6 & Chart 3).

The share of 285 projects for expansion (Rs. 45,552 crore) stood at 46.8 per cent in 2004-05 as compared with 206 such projects accounting for 30.9 per cent in the previous year.

Overall, the investment climate that distinctly improved in 2003-04 stayed favourable during 2004-05. The upward momentum in corporate investment in 2004-05 was reinforced by a variety of factors including accelerated growth in the industrial sector, infrastructure development in the form of roads, ports, telecom and power, high credit off-take from the banking sector and benign interest and inflation rates. Led by significant growth in manufacturing sector during 2004-05, achieved on a reasonably high base, capacity utilisation could be expected to improve significantly. Continued expansion has been supported by domestic and external demand, with latter evident in robust growth of merchandise and services exports. Considering that domestic production of capital goods has accelerated recording 12.6 per cent growth in 2004-05 on top of 13.6 per cent growth last year, and also that capital goods imports in 2004-05 have increased by 23.5 per cent on top of 35.4 per cent growth in corresponding period last year, fixed investments appear to be notably positive reflection of conducive climate. Interestingly, favourable industrial climate was sustained inspite of less than satisfactory monsoon in 2004-05. Corporate results continue to be good over last few quarters. Credit off-take from the banking sector has accelerated to industries such as infrastructure, construction, electricity, and petroleum. This indicates good industrial investment demand.

The improved investment sentiments and business confidence is reflected in increased number of firms incurring capital expenditure and the extent of such spending. The total project cost as well as the average cost of projects went up significantly in 2004-05 reflecting increased investment opportunities. The total project expenditure of all the projects sanctioned assistance in 2004-05 amounted to Rs. 97,270 crore as against Rs . 72,940 crore in 2003-04. The capital

Table 6: Purpose-wise Distribution of Projects and their Cost During 2003-04 and 2004-05

expenditure expected in 2004-05 including that on the projects sanctioned assistance in all the prior years, amounts to Rs. 69,140 crore, indicating a substantial rise over that of the previous year.

The prospects for the Indian economy remain encouraging. It is too early to gauge the impact of deficiency of rain fall in June on the agricultural production. Given the base effect arising from low growth last year and the fact that rabi crop now is almost as important as kharif, agriculture is expected to contribute positively to the overall growth in 2005-06. Manufacturing sector’s dependence on agricultural growth appears to have diminished in recent years with the sector recording a growth of 6.0 per cent or more in each of the last three years, despite two of those years being bad monsoon years. There has been healthy growth in non-food credit off-take that supports the momentum in industrial production coupled with buoyancy in export growth. The momentum in industrial growth, led by manufacturing, has been sustained in the first two months of 2005-06 and is broad based. Indications are that both consumption and investment demand are currently buoyant. Business surveys point to high levels of both business confidence and capacity utilisation. Seasonal slowdown in credit demand, generally seen in the first quarter, is not observed this year. However, risks to growth and investment remain arising mainly from continued surge in international oil prices.

The envisaged capital expenditure which has grown for the past three years, is susceptible to a slow down due to its cyclical nature. The planned investment for 2005-06 based on the projects which have been sanctioned financial assistance in the years prior to 2005-06, amounted to Rs. 42,144 crore. The aggregate capital expenditure in 2005-06 would also include capital expenditure on projects sanctioned assistance in that year. Therefore, if the aggregate capital expenditure in 2005-06 has to show growth over that in 2004-05 (i.e., Rs. 69,140 crore), the capital expenditure in 2005-06 on new projects must be over Rs. 26,996 crore. Since business conditions remain conducive to support corporate investment demand and lending rates remain low while corporate balance sheets are in a generally sound position, such an amount of investment in 2005-06 on new projects sanctioned assistance seems to be very likely. In other words, the year 2005-06 may witness an increase in corporate investment when compared to that in 2004-05.