While major economic indicators are showcasing rapid growth in India the major question is why corporates are going slow on capital expenditure. When will they unleash the animal spirits and go big on expansion? The current growth which is largely driven by infrastructure is facilitated by public capex.

The whole-time director of Kotak Mahindra Bank had told me that greenfield capex is very low from the corporate side compared to brownfield capex.

Despite India’s robust economic growth and optimistic forecasts for the future, the corporate sector appears hesitant to ramp up capex.

The combined revenues of major listed companies witnessed a modest 2.5% year-on-year growth in the first nine months of FY24, reflecting a notable deceleration compared to the robust 22.7% growth observed in the preceding fiscal year.

The slow growth in bank credit to the industry further underscores the subdued appetite for capital expenditure. Data from the RBI indicates that bank credit to the industry increased by a mere 6.8% year-on-year during the April-December 2023 period, down from the 10.7% growth recorded in the corresponding period of the previous fiscal year.

The latest data from the National Statistical Organisation (NSO) reveals that India’s gross domestic product (GDP) experienced a notable expansion, registering an 8.4% year-on-year growth in the October-December quarter of the fiscal year 2023-24 (FY24). This growth trend follows a trajectory of improvement from the 7% GDP growth recorded in the previous fiscal year.

Analysts and rating agencies have consequently revised upwards their growth estimates for FY25, with Reserve Bank of India (RBI) Governor Shaktikanta Das suggesting that the GDP growth for FY24 might approach 8%.

The hitch
Despite these positive indicators, India Inc remains cautious about increasing capex investments, with sluggish consumer demand emerging as a primary deterrent.

Analysts attribute this reluctance to accelerate capex to a myriad of factors, including the consumer demand scenario remaining tepid, with only select segments experiencing growth, such as automakers, while others witness stagnation or contraction.

Furthermore, the decline in goods exports by 4.9% year-on-year for the first ten months of FY24 has added to the challenges, leading to a decreased share of goods exports in India’s GDP.

While experts acknowledge the potential for a revival in corporate capex in sectors like automobile, capital goods, and electronics, driven by government initiatives such as infrastructure spending and production-linked incentive schemes, the overall sentiment remains cautious.

There is a growing concern about the fiscal drag on growth and investments, as reflected in the Union government’s projections for lower capex expenditure in FY25 compared to previous years.

As corporate India navigates these challenges, the focus remains on overcoming barriers to investment and harnessing the momentum of economic growth to propel a new cycle of capex-led expansion. However, the path forward necessitates addressing the underlying factors restraining investment appetite and fostering an environment conducive to sustainable economic growth.

The green shoots

Meanwhile, there are hopes of a private capex upswing, driven by bolstered corporate balance sheets and improved access to credit financing. Projections indicate that the private corporate capex cycle is on track to achieve its highest level in a decade during FY24, as detailed in a study featured in the RBI Bulletin from August 2023. According to data from the Ministry of Corporate Affairs, private capex has demonstrated an 8.5% compound annual growth rate (CAGR) from FY19 to FY23, reaching Rs 6 lakh crore.

Anticipated interest rate cuts in FY25 and enhanced balance sheets are expected to further stimulate growth. Recent quarters have witnessed a surge in optimism surrounding private capex, buoyed by favourable governmental policies.

Listed corporates have witnessed a substantial increase in capex, more than doubling from FY2017-19 to FY2024. This surge has been chiefly propelled by key industries such as energy, automotive, and industrials. Moreover, heightened capacity utilisation levels, particularly within the manufacturing sector, augur well for private capex. Despite a marginal decline in the first quarter of FY2024 compared to the preceding quarter, capacity utilisation remained higher than the corresponding period last year, indicating potential for subsequent capacity expansions.

Major investments are being spearheaded by industry giants, including Mukesh Ambani, Gautam Adani, Sajjan Jindal, Lakshmi Mittal, and the Tata group. Notably, Reliance Industries plans to inject $10 billion into the development of an energy ecosystem. Similarly, the Adani Group is embarking on ambitious initiatives, earmarking $100 billion for investment, with a significant portion allocated to clean energy projects. Tata Power has outlined a capex of Rs 60,000 crore by FY27, with nearly half of the investment dedicated to the renewables sector.


Borrowings lift

With robust tax buoyancy, the government is also set to reduce borrowing in FY25, thereby opening avenues for expanded private borrowing. The Union Budget has projected a fiscal deficit of 5.8% for FY24, marginally lower than expected, and fiscal deficit of 5.1% for FY25. This disciplined fiscal strategy underscores a firm commitment to restraining government borrowings, allowing for an uptick in private-sector borrowing.

The Reserve Bank of India (RBI) has emphasized the imperative for the Indian corporate sector to leverage the lower borrowing costs to initiate capex and alleviate the burden on the government, as highlighted in the RBI’s February State of the Economy report.

“Overall, the corporate sector must take advantage of the space ceded in financial markets by a lower budgeted borrowing programme and the easing of borrowing costs that has already begun in response to the Interim Budget for 2024-25, driven as it is by capex and consolidation,” said the report.

(Editor’s Note is a column written by Amol Dethe, Editor, ET CFO. Click here to read more of his articles exploring several buzzing topics.)

  • Published On Mar 29, 2024 at 09:14 AM IST

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