Navigating Capital Expenditure Trends: Insights from the March Quarter
In the March quarter, plans for capital expenditure plummeted by a significant 30%, indicating a cautious stance among investors. A staggering Rs 1.7 trillion worth of projects were put on hold during the same period, marking a substantial decline in new investment initiatives. This downward trend, extending from the previous two quarters, raises doubts about the optimistic economic outlook proclaimed by the government, especially about the purported increase in private investments and the downward trajectory of inflation.
Both private and government sectors witnessed a parallel decline in investment announcements, each experiencing approximately a 30% decrease. Despite this, the absolute value of private sector projects unveiled, amounting to Rs 9.8 trillion, remained the highest since the corresponding quarter of the previous year. However, it’s worth noting that the March quarter typically witnesses a surge in investment declarations.
The cautious approach adopted by companies, possibly due to the impending elections, might be a contributing factor to the slower pace of new project announcements. However, the alarming aspect lies in the substantial increase in abandoned, shelved, or stalled investment projects, amounting to Rs 1.71 trillion in the January-March period, the highest since March 2019. This surge in abandoned projects underscores the fragility of the current capital expenditure cycle.
The private sector’s share in new projects witnessed a decline, slipping to 86.5% in the March quarter from a peak of 91.2% in the previous quarter. Specifically, new project announcements by the private sector decreased by 29% to Rs 9.8 trillion, while those by the government sector dropped by 30% to Rs 1.5 trillion. This downward trajectory has been consistent, with government project announcements contracting year-on-year for five consecutive quarters and private sector announcements declining for three consecutive quarters.
Reflecting this trend, gross fixed capital formation as a percentage of GDP slowed down marginally in Q3FY24 compared to the previous year. Additionally, the government’s final consumption expenditure contracted, further indicating a cautious approach to spending.
The peak in new project announcements observed in the previous year has been followed by a significant decline, with announcements more than halving in the subsequent quarters. However, there is a glimmer of hope as projects completed in the March quarter witnessed a notable increase of 38% compared to the same period last year, signaling some progress amidst the prevailing uncertainties.