With the economy growing consistently well over 9 per cent for the past two years and consumer spending touching new heights, many Indian firms have been busy lining up massive investment plans (to expand production capacities to meet the higher demand levels) for the next few years.
The massive demand for the products of Indian firms is reflected in the whopping 68.6 per cent rise in the order books of India Inc during the first ten months of 2007 compared to corresponding period last year. The total orders received by Indian firms was worth US$ 32.57 billion (January-October 2007) as against US$ 19.31 billion in the same period a year ago.
Simultaneously, the rising consumer demand has provided a further growth avenue for Indian firms. In fact, according to McKinsey, Indian consumer is likely to quadruple US$ 1.77 trillion by 2025, spurred by the ten fold increase in middle-class population and three-fold rise in household income.
Consequently, firms are making investments to ramp up production capacity to reap economies of scale. Also, this increase in investments is across varied industrial sectors like retail, real estate, steel, infrastructure, automobile, telecommunication among others.
The increase in the domestic investment levels can be gauged from the continuous rise in gross domestic capital formation (GDCF) as a percentage of GDP. GDCF (at constant prices) as a per cent of GDP has increased from 27.2 per cent in 2003-04 to 33.8 per cent in 2005-06 and further to 36.77 per cent in 2006-07.
Private Capital Investment
The continuous improvement in the investment scenario and business confidence of India Inc is also reflected in the increase in both the number of companies making/planning capital investments and the extent of such investment. The turnaround in corporate investment, which began in 2002-03 and peaked in 2004-05, is expected to be sustained in 2007-08.
A report prepared by RBI analyses the corporate investment scenario based on the companies covered by institutional finance. According to it, the total cost of projects sanctioned assistance by banks/financial institutions (FI) in 2006-07 amounted to US$. 71.12 billion, as against US$ 32.94 billion in 2005-06.
Significantly, there has been increase in the scale of projects taken up the by the corporate sector. While there were 49 projects amounting to US$ 18.81 billion in 2005-06 with a projected cost of over US$ 125.43 million, in 2006-07 there were 88 large projects amounting to US$ 50.51 billion (accounting for over two-thirds of the total project cost) in 2006-07.
In fact, if we include the proposed investment of companies contracting external commercial borrowings (ECBs) and those issuing domestic equity capital, then total investment proposals for 2006-07 works out to US$ 86.69 billion spread over 2004-05 to 2011-12.
In 2006-07 alone, the capital expenditure envisaged amounted to US$ 38.89 billion, as against US$ 24.27 billion envisaged in 2005-06. Significantly, the 60.2 per cent rise in capital expenditure comes on the back of 23.1 per cent increase in 2005-06.
Industry-wise, infrastructure has the highest share of 35.9 per cent of total cost of projects, followed by coke and petroleum products (15.5 per cent), metal and metal products (14.1 per cent) and textiles (9.2 per cent).
State-wise, Gujarat ranks first with the proposed investment of US$ 18.6 billion in 86 projects accounting for 25.8 per cent of total investment in the country followed by Andhra Pradesh (8.9 per cent), Maharashtra (8.6 per cent) and Tamil Nadu (8.6 per cent).
Corporate Performance
The impressive performance of the domestic companies has also been playing a major role in the steady rise in the investment plans of these companies. For example, the sales of non-governmental non-financial companies rose by 26.2 per cent in 2006-07. Similarly, gross and net profits increased by 41.5 per cent and 45.2 per cent, respectively.
In fact, the top 500 companies (including public sector) aggregate total income grew by 28.4 per cent to US$ 485.07 billion in 2006-07, says a report by leading global business information provider Dun & Bradstreet.
In the current fiscal too, the performance of the corporate sector has been quite encouraging. While sales grew by 17.4 per cent in the first half of 2007-08, gross and net profits rose by 28.1 per cent and 31.1 per cent, respectively. Similarly, other income from non-core activities registered a 63.6 per cent.
Another factor reflecting the confidence of the Indian Inc on the prospects of the domestic economy is the massive increase in the number of companies being incorporated. About 55,000 companies have been incorporated annually in the last two years, taking the total number of incorporated companies to 865,000 from 712,000 companies at the end of 2005.
Some Investment Highlights
Some of major investments that have been lined up for the next few years include:
NTPC plans to invest US$ 40 billion in the next five years to transform itself into an integrated player.
The Anil Dhirubhai Ambani Group (ADAG) plans to invest US$ 37.63 billion in power and transport sectors in five years.
Real estate major, Parsvnath Developers, plans to invest US$ 15.05 billion to diversify their business.
Vedanta Resources will invest US$ 6.02 billion to set up a 5 million tone steel plant.
Infrastructure major GMR Group has planned to invest more than US$ 15.05 billion over the next five-six years to enhance its power generation capacity.
Indian Oil Corporation (IOC) plans to spend US$ 10.99 billion over the next five years to carry out its expansion programmes.
Special Economic Zones
Special Economic Zones (SEZs) are being developed to attract huge inflow of domestic (and foreign) investment in infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities.
To achieve this government has announced many fiscal incentives like: duty free import of capital goods; income tax exemptions; exemption from Central Sales Tax, Minimum Alternate Tax, State Sales Taxes and other levies; simplified compliance procedure among others.
Consequently, many producers and developers have evinced a keen interest in setting up SEZs. Ever since SEZ Act has come into force, the number of SEZs notified has already reached 195 (as on January 24, 2008). In addition, formal and in-principle approvals have been given to 439 and 138 SEZs, respectively. These are in addition to the 19 functional SEZs that have been set up prior to SEZ Act, 2005.
The rapid pace of activity in these zones can be gauged from the fact that, in the two years since the SEZ Act 2005 has come into force, they have facilitated a rise of 200 per cent in exports from these zones. They have also been instrumental in an incremental investment of US$ 17.66 billion.
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