New investment projects will increase by 71% in 2022 as the economy strengthens

After two disappointing years hit by the Covid pandemic, the Indian industry is showing signs of optimism on the investment front.
The industry’s new investment plans rose 71 percent in the 2022 calendar year as lockdown restrictions were lifted and the economy reopened.
On an overall basis, total investment projects have risen to Rs 23.6 lakh crore in 2022 from Rs 13.8 lakh crore in the previous year and Rs 11.6 lakh crore in 2020.
In fact, announcements of Rs.23.6 lakh crore have been made by 2022. According to data compiled by CMIE and Bank of Baroda, this is the highest in the last six years.

With the reopening of the economy and a gradual pick-up in economic activity, new investment was reported to have risen to Rs 8.6 lakh crore in the March 2022 quarter.
Since then, there has been a decline in new announcements in Q1 of FY23 and Q2 of FY23. “However, things are now starting to look promising.
As of December 2022, there is a steady increase in new announcements and stands at around Rs 6.1 lakh crore compared to Rs 3.7 lakh crore in September 2022 and Rs 4.2 lakh crore in the December 2021 quarter,” BoB said.
Will these plans come to fruition?

Given the gross fixed capital formation rate which has stagnated at 27-29 per cent in the last 5 years, it also seems that when investment announcements are made, they are not necessarily implemented. In this context it would be relevant to look at the financial side where banks play an important role.

Non-food credit grew 8.9 per cent on a year-on-year basis ending November 18, 2022, the latest sector-wise data from the banking business showed. The figure was 1.8 percent last year, with data up to December 16 further increasing growth to 10.5 percent from 3.3 percent last year, according to a BoB research report.
Making announcements is quite different from their implementation and the last 5 years have seen magic,” said Madan Sabnavis, Chief Economist, BoB.
Which sectors express the goals?

Chemicals and related products accounted for 54.1 percent of total new announcements made between April-December 2022, with machinery accounting for 54.1 percent, BoB said.
Chemicals and allied sectors saw a boom on the basis of new announcements, whose share was relatively low earlier. For the power sector, the share of new announcements is growing at a healthy pace of 27.4 per cent, the BoB report said.

Which sectors have declined?

The share of new announcements in the metals sector has registered a decline in the nine-month period compared to the same period last year.

Transport services (mainly airlines) have the highest share in terms of new notifications. However, its share of new announcements fell sharply in the nine-month period compared to the previous three years.

As the construction and real estate sectors are also disappointed, the share of new investment projects has decreased this time and many new projects have not been launched.

Will rising interest rates hurt investments?

Despite improvement in credit growth to industry, it is still underperforming as overall non-food credit provision stood at 17.4 per cent as on December 16, 2022, according to RBI data. As the RBI has hiked interest rates by 225 basis points from May 2022, the overall progress has been satisfactory, even as the industry’s debt write-off stands at 10.5 per cent.

Corporates have until recently relied heavily on the bond market for funding. However, bond yields are now starting to rise, making it an expensive option. On the other hand, banks have started raising loan interest.

The reaction of bank interest rates to repo rate changes varies. Average lending rate for new loans increased by 135 bps as retail and SME loans are mostly benchmarked with this rate.

In outstanding loans, the increase was only 71 bps. The increase was around 96 bps on one-year MCLR basis. Corporate loans are generally affected by MCLR, so the cost does not increase in line with RBI’s repo rate hikes.