In the previous two Union Budgets, the government took steps to improve the investment climate in India, but this turned out to be an exercise in futility because the share of capital investments in GDP continued to fall. Investments as a percentage of GDP have fallen from 34% in fiscal 2012 to 29% in fiscal 2017. The Central Statistical Organisation estimates that fixed investment has declined 0.2% in this fiscal. As for the private sector, the appetite to invest is just not there amid high leverage and impaired balance sheets.
 

Private investment was expected to take another year to recover – even before demonetisation. According to the Reserve Bank of India’s OBICUS survey, capacity utilisation in manufacturing was 73% in the quarter ended June 2016, or well below the threshold required to trigger fresh investments. Things haven’t changed materially since.
 

Capacity utilisation could have improved had domestic consumption been higher, as was expected in the second half of this fiscal. However, the cash crunch following demonetisation curbed demand. That, in turn, could delay revival in private investments.
 

CRISIL’s surveys show automobiles, cement, steel, paper, aluminium and fertilisers had the lowest capacity utilisation – and many of these have been the ones hardest hit by demonetisation. For instance, domestic sales of auto industry slumped 18.7% in December. Short-term demand for cement and steel will also be affected, since 60-65% demand for cement, and 30-35% demand for steel comes from the cash dependent real estate sector.