Weak domestic consumption demand, global overcapacity and the adverse impact of Goods and Services Tax on working capital of businesses will leave capital expenditure subdued over the next two years.
Any meaningful capex recovery will only take place beyond financial year 2019-20, India Ratings said in a report today.
Over the next to years, private capital expenditure will rise to Rs 1 lakh crore at a compounded annual growth rate of 5-8 percent, largely in the form of maintenance and essential upgrades of the non-stressed asset-heavy corporate, Priyanka Poddar, senior analyst, India Ratings and the lead author of the report noted. Of the top 200 asset heavy companies, only 125 non-stressed companies will spend on maintenance while the remaining 75 may face “difficulties in undertaking even maintenance capex,” the report added.
Capacity utilisation of stressed corporates – as low as 40 percent – could derail the overall investment recovery for another three years, India Ratings said.
Asset Quality Pressures
The Reserve Bank of India has already identified stressed and asset-heavy companies which hold a large chunk of the banking sector’s Rs 8.8 lakh crore bad loans in two separate lists. These companies will be referred to insolvency proceedings if their debt restructuring fails. As work on addressing these stressed assets continue, the country continues to face an economic slowdown with private investments stagnant since 2015, India Ratings said.
While the resolution process should act as an encouragement for increased investment Under the Insolvency and Bankruptcy Code (IBC), consolidation of under-utilised capacity of these corporates could delay the overall recovery in investment, the report said.
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Source: Global Economy