After a contraction of 0.5% in March, factory output in April rose 3.4%, thanks to a 16% jump in the capital goods segment, the highest rise in nine months and a big swing from the
negative 11.6% in March. The trend in the production of capital goods tends to be somewhat uneven, but on a three-month moving average basis, the segment continues to show negative growth. There is some consolation in the performance of intermediate goods, up 4.4% in April. While that may suggest investments are picking up, there is nothing to corroborate this. Loan growth over the past six months has averaged 14.5-15% and the bulk of the money continues to be used either for working capital or for retail loans; bankers say there are virtually no takers for project finance. Much of the corporate borrowings overseas are being used to refinance costlier debt taken earlier. The poor demand for credit suggests companies aren’t looking to expand capacity just yet, hardly surprising given that a fair share of existing capacity is lying idle—sales of CVs at Tata Motors, which have been declining for more than a year now, fell a sharp 25% yoy in May. If demand is not adequate to take care of even the current capacity, there can hardly be reason for adding to it.
Even those promoters that have the financial wherewithal to commission new capacity are likely to wait to see signs of demand picking up before they contemplate any expansion. Sales of cars and two wheelers may be inching up—Maruti Suzuki reported a 16.4% yoy increase in domestic sales volumes in May while HeroMoto’s volumes rose 8% yoy—but there are no clear signs that demand will increase way beyond what manufacturers can currently supply. The contraction in consumer durables of 7.6% in April is proof of this. Again, with the economy having slowed over the past couple of years to sub 5%—and a good chance it will grow at around 5% again in FY15 if the monsoon is poor—calculations of demand in certain sectors such as power have gone completely awry. Which is why it is not surprising that BHEL’s order book at the end of March 2014 actually shrank over the previous year’s levels. It is, therefore, still too soon to call a turn in the capex cycle.