India – Investment improved, temporarily, in Q3-FY16

Economic Alert | 5 January 2016

·        Investment resumed its uptrend in Q3-FY16, driven by a one-off increase in private-sector investment

·        Stalled projects increased for the second straight quarter; pace of new project announcements slowed

·        Investment is likely to slow in Q4-FY16 before improving gradually in FY17

Investment likely to slow

Incremental investment, which tracks projects under implementation across all sectors, improved in Q3-FY16 (quarter ended December 2015) due to a one-off increase in private-sector investment, according to CMIE data. We expect investment to slow in Q4-FY16, as another private-sector investment on the same scale is unlikely and the government is likely to trim capex to meet its FY16 fiscal deficit target. Stalled projects increased for the second consecutive quarter, albeit at a gradual pace; INR 10.8tn of aggregate stalled projects pose a major headwind to India’s investment revival. We expect the investment cycle to improve in FY17 as the government budgets fresh capital expenditure. However, the pace of investment is likely to be slower than in FY16 as the government balances the competing objectives of narrowing the fiscal deficit, raising salaries for public-sector employees, and increasing capex to support the nascent investment recovery. Private-sector investment is likely to improve mildly in H2-FY17.