Fiscal 2011-12 has been a very disappointing year for investments. Official statistics show that the production of capital goods declined by 2.9% in the first three quarters and growth in fixed capital formation declined by 0.2%. The Budget speech did not contain any policy intervention that would change this direction. The reduction in coal import duties and more tax-free bonds from public sector infrastructure companies will help, but these are not direction changers. Still I believe the direction will change because there is much in the pipeline to sustain capex for a few more years—happily independent of government largesse.
Capital goods production started showing signs of weakness early in 2011. By July, it was in the negative zone—lower than it was in the corresponding period of the previous year. During the July-September 2011 quarter, capital goods production was 5.8% lower than it was a year ago. In the quarter ended December, the y-o-y decline worsened to (-)16.2%.
The recovery in the capital goods index from its fall after the 2008 crisis was almost entirely lost by the December 2011 quarter, when the index was at the same level as it was three years ago in the December 2008 quarter.
This decline in the production of capital goods is reflected in the quarterly GDP growth estimates. Gross fixed capital formation (GFCF) during two consecutive quarters—the September and December 2011 quarters—were lower than their respective levels a year ago. Two consecutive quarters of a y-o-y fall in the GFCF have never been seen in the quarterly GDP growth series—not even in the aftermath of the 2008 crisis. So, is this a confirmation of the end of the investment cycle? Or, is it worse?
Two consecutive quarters of decline certainly look ominous. Particularly when they follow two quarters that barely remained above water (0.4 and 5%, in the quarters ended March and June 2011). A simple projection for the year indicates the growth in real GFCF will be of the order of 2% in 2011-12. But the growth in real GFCF (closest indicator of investments in the official statistical system) does not quite connect with the behaviour of companies. For example, growth in real GFCF shows that investment growth peaked in 2004-05, while the growth in company assets (closest indicator of investments in companies’ financial statements) showed the peak was in 2008-09. Also, while companies report a peak in 2008-09 and a sustained high growth of net