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| Mahesh Vyas: Capex - How the data belies the perception | | Even as industry associations lobbied for concessions during the 2008-09 crisis, companies were investing aggressively |
| Mahesh Vyas / Aug 26, 2010, 00:26 IST |
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In times of crises, such as the one we faced in 2008-09, many agencies conduct quick polls in which decision makers assess the extent of the damage. With the rise in technology and organised media participation in building perceptions, decision makers seem to have wisened up to the trend. They may now consider a choice in responding to such a poll with a correct perception or with a response that is most beneficial to them. During a crisis, there really is no “correct perception”. Everyone is looking at everyone else and is a lot more uncertain than everyone was earlier. And, in such conditions, responding with a choice that is most beneficial to them seems rational.
The choice that would have been most beneficial to industry in October 2008 would be to claim that the crisis was life-threatening and that the government needed to act quickly to provide sops to the industry. Collectively, it did exactly that. Industry spokespersons, association statements and even company spokespersons speaking in public fora or in private described the crisis as extremely severe and they painted the future as a black, bottomless abyss of doom and disaster. Most associations provided the government with a long to-do list. Now, the data shows that while industry associations cried themselves hoarse about the crisis that their members apparently faced, industry itself was investing aggressively into a future that it believed would be something it had never seen or anticipated before. Corporate India was financially strong like never before and it was willing to wager on the future of India in spite of the turmoil.
The year 2008-09 was corporate India’s first exposure to a global financial crisis since it became free to decide its own destiny. Indian companies not only emerged unscathed from the crisis, they also demonstrated their strengths and foresight with alacrity.
Financial statements published by over 8,750 large and medium companies show that collectively they grew their net fixed assets by a handsome 19.6 per cent in 2008-09. This is the highest growth in assets in nearly 15 years. Growth in net fixed assets has been accelerating since 2005-06. And, this acceleration did not stop in 2008-09. Net fixed assets grew from less than 10 per cent per annum till 2004-05 to 14.2 per cent in 2005-06, 14.8 per cent in 2006-07 and 15.4 per cent in 2007-08 before scaling up to 19.6 per cent in 2008-09.
Although it is understandable that industry associations would paint a gloomy picture during a perceived crisis and ask for government help, why do analysts and senior media professionals also paint a similar picture? The answer, perhaps, is in the data.
Only about 20 per cent of the companies grew their net fixed assets by over 19 per cent in 2008-09. Half of the companies saw their net fixed assets shrink. So, if you asked around, one in every two persons would have told you that they were shrinking their assets and so was every other person that s/he knew in business. This would be an honest statement.
People would candidly acknowledge this situation in 2008-09, because it would not necessarily damage their image and would increase the probability of some kind of a bailout.
But, this situation is not peculiar to 2008-09. In almost any year in the past ten years, half of the non-finance companies were shrinking their net fixed assets. More importantly, only about 20 per cent of the companies were growing their assets at a level that was higher than the average growth in assets. This also reveals that growth in fixed assets is getting increasingly concentrated in large companies.
So, it was normal in these lean years since the mid-1990s for companies to shrink operations and only for a small set of large companies to pull the overall growth. But, perhaps, it was not normal for one to acknowledge this distribution. It was also not normal for the media to pose such a question, because this distribution was unknown.
Interestingly, in the past four years, about 5 per cent of the companies have been doubling their net fixed assets in a year. In the mid-1990s, 5 per cent of the companies were trebling or quadrapuling their net fixed assets. Also, if we trim the top and bottom observations to remove the extreme values, the growth in net fixed assets around now seems to be a trifle lower than that seen in the mid-1990s.
However, the CapEx database suggests that the current investment boom will last longer than the one in the mid-1990s. New projects worth Rs 5,80,000 crore were announced in the quarter ended June 2010. This marks a steady increase in the value of new projects being announced since June 2009 when they were a mere Rs 1,90,000 crore. It was Rs 3,50,000 crore in the September 2009 quarter, Rs 3,90,000 crore in the December 2009 quarter and Rs 4,50,000 crore in the March 2010 quarter.
New investment proposals had peaked in March 2009 at Rs 8,80,000 crore. But, this is possibly an aberration caused by the Vibrant Gujarat Summit. Adjusted for this, the new proposals add up to Rs 5,20,000 crore. The average new investment proposal per quarter during 2007-08 and 2008-09 was Rs 4,60,000 crore. Thus, the Rs 5,80,000 crore worth of new investment proposals recorded in the June 2010 quarter mark a new high in investment proposals.
Project completions have been rising. Further, the increase in the number of projects being shelved, a trend that was noticed during the crisis period, has ebbed.
Thus, there is clear evidence that the investment boom is firmly in place. It is also apparent that confidence has repaired. But, the lesson to learn is that there are good reasons why perceptions can mislead in important times.
The author is managing director and CEO, Centre for Monitoring Indian Economy
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