Indian Transformer Manufacturers Association

Recent trends in investment and the growth of Capital goods industry

Ministry of Finance
Department of Economic Affairs
Economic Division

1. A notable feature of the growth of the Indian Economy from 2002-03 has been the rising trend in the Gross Domestic Capital formation (GCF). Gross Capital Formation (GCF) which was 25.2 per cent of the GDP in 2002-03 increased to 35.9 percent in 2006-07. Much of this increase is attributable to a rise in the rate of investment by the Private Corporate Sector. The rise in the rate of investment has been on account of various factors, the most important being the transformation in the investment climate, coupled with an optimistic outlook for the growth of the Indian economy. The positive perception about macroeconomic stability arising from the fiscal consolidation process has also been responsible for improvement in the perception.

2. The increase in the overall investment has mainly been on account of a rise in gross fixed investment. Gross fixed investment which was 23.6 percent of GDP (at 1999-2000 prices) in 2002-03 increased to 30.6 percent in 2006-07 and is estimated to have risen further to 32.6 percent in 2007-08. In terms of the sectoral composition of investment, the manufacturing sector witnessed a sharp increase in investment which grew at 33.6 percent on an average during the tenth plan period (2002-03 -2006-07).

3. Investment data from national accounts statistics and from corporate results mainly reflect physical investments that have already taken place. Since investment is generally considered as a forward looking variable, especially where physical investments are made by the private sector or where public investment goes to relax critical infrastructure constraints, the continuing rise in the rate of investment witnessed thus far augurs well for further growth of the economy.

4. The process of investment in the economy generates demand for capital goods. The demand for capital goods is derived from the investment intentions that get translated into investment decisions. There are lags involved between investment intentions, investment decisions and the demand for capital goods translating into actual production of capital goods. Nevertheless, any significant change in the trend in the growth of capital goods production needs to be viewed carefully. The Index of industrial production data includes capital goods as a specific use based category

5. Recent development in industrial growth: The index of Industrial Production (IIP) released by the Central Statistical Organization for January 2008 shows that the overall industrial growth during January 2008 was 5.3 per cent as compared to 11.6 per cent in January 2007. Though the cumulative growth during April-January 2008 at 8.7 per cent is still good, it is evidently lower than the 11.2 per cent growth rate witnessed in April-January 2007.



6. Growth in production of Capital goods: On a cumulative basis during April–Jan 2007-08, capital goods maintained an appreciable rate of growth of 18.3 per cent which is same as in the corresponding period of the previous year. While the cumulative growth in IIP is still respectable there has been a decline during month of January 2008 in all categories (barring consumer non-durables). The capital goods segment which showed low growth of 2.11 percent in Jan 08 is the focus of the current meeting. Though its weight is only 92.6 out of a total of 1000, its importance arises on account of reasons outlined earlier.

7. Out of the 55 items (at the 4 digit level) that are classified as capital goods in the Index of Industrial Production, 38 items forming about 64 per cent of the total weight of the capital goods sector (in IIP) are under the group - “machinery & equipments other than transport equipments”. Another 10 items are from the group “transport equipments and parts”. Corresponding to the sluggish growth in capital goods in January 2008, it is found that the “machinery and equipments...” group had a negative growth of 3.8%. Out of the 55 items in the capital goods sector, 36 items showed positive growth in January 2008 while 17 items showed negative growth.

8. The importance of capital goods stems from the fact that they essentially go toward fixed investment in plant and machinery and therefore get reflected in the capital formation in the subsequent period. The production of capital goods tends to be order based. Therefore, the trend rates (ie the cumulative performance over the year), rather than month to month variations that are more reliable. Nevertheless, in view of the criticality of the capital goods sector in sustaining capital formation, any sharp fluctuation needs to be validated by considered views from the industry.

9. Pointers for the discussion with industry:

1) Perceptions about the overall climate for investment
2) Perceptions about the current trend in demand for capital goods
3) Demand for capital goods required by the infrastructure sector
4) Investment trends in specific segments of capital goods industry represented in
the meeting (eg: power equipment, heavy engineering, commercial vehicles ….)
5) Critical constraints

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