India Economics:Private capex weakens further;recovery to take time

CMIE releases capex data for QE Dec-17 – private capex activitydeteriorated: We closely track the quarterly CMIE capex data to assess theunderlying trends in investment activity by the government and private sector.

The key takeaway from the data for quarter-ending (QE) Dec-17 is thatprivate capex activity has further weakened with a continuous decline inprivate projects under implementation and new investment inflowsslowing to the lowest since Dec-13. Government capex activity has beenholding up, with projects under implementation growing at a double-digit pace,however, new investment inflows have slowed in QE Dec.

Private capex recovery to take time: As we have been highlighting, webelieve that a full-fledged recovery in private capex will take time to unfold.

The reasons holding back private capex are well-known – low capacityutilization, stressed corporate and banking sector balance sheets. The recentefforts of policy makers to address the stressed loans through strengtheningthe legislative framework (implementation of IBC) and announcing therecapitalisation of PSU banks (which account for the majority of stressedloans and also 70% of the credit) will help address part of the problem.

However, challenges remain due to weak demand / low capacity utilisationlevels. In our view, an improving global growth environment coupled withdomestic demand normalising post the disruptions caused by demonetizationand GST will help in a gradual improvement in capacity utilisation in the next12 months. In this context, we expect a tepid recovery in private capex in2HFY19. We believe that government efforts to step up infrastructureinvestments will be critical in the face of a delayed private capex recovery.

Projects under implementation: Growth in projects under implementationslowed in QE Dec led by decline in private projects (7th consecutive quarter)while growth in public projects remained steady at a double-digit level.

Industry-wise data reveals that the decline in private projects was broadbasedwith the manufacturing, electricity, construction and services segmentsregistering a decline.

New project inflows: New investment project inflows slowed to the lowest in13 years in QE Dec. Both government and private new investment flowsslowed; however, the weakness was more pronounced in private investmentmainly due to declines in the manufacturing and construction / real estatesegments.

Projects stalled: Projects stalled declined sequentially in QE Dec, led by theprivate sector even as the government sector saw a rise in projects stalled (ona quarterly sequential basis).