– By Gaura Sengupta
Over the last few years conditions have been conducive for recovery in private corporate capex. For starters balance sheets of both banks and corporates are in much better shape. Capacity utilization in the manufacturing sector has increased to 75% since last year (on a 4-quarter moving average basis), which is associated with pick-up in investment. The last time capacity utilization was at 75% or higher for more than a year was over 2010 to 2013. GDP growth since FY23 has averaged at 7.6%, indicating strong recovery in domestic growth momentum post Covid-19.
Over the last few years some recovery in the capex cycle is seen but the pace of recovery has been below expectation. Investment to GDP has risen to 30.8% in FY24 which is marginally higher than pre-Covid19 levels of 29.5% in FY19. The recovery in investment has been led by real estate, private corporates and the general government. Based on data available till FY23, private corporate capex has risen to 10.9% of GDP from 10.3% in FY19 (pre-Covid 19). Household sector investment, which is mainly real estate picked-up to 12.9% of GDP in FY23 from 12.1% in FY19. In FY24 and FY25 the pick-up in household investments has continued, reflected by bank credit data. Household mortgage loans from banks have risen to 9.1% of GDP as of Q1FY25 v/s 6.9% as of FY23 Q1. Meanwhile, infrastructure loans from banks remained more muted in FY25. There has been substantial support from the government both Centre and state government, with sharp increase in capital expenditure in FY24. Some of this support has waned in FY25, with decline in capital expenditure in H1FY25, with focus shifting towards elections.
The last time India saw a strong pick-up in the capex cycle was during FY05 to FY08, with average growth in gross fixed capital formation at 14.5%. During this period investment to GDP ratio had risen to 35.8% of GDP in FY08 from 28.3% in FY04. The improvement was led by private corporate investment which rose from 6.6% of GDP in FY04 to 17.3% of GDP in FY08.
One of the factors which supported the capex cycle was consistent growth in private consumption expenditure, which averaged higher than 6%. Another supportive factor was strong export growth (goods and services) which averaged at nearly 20% over FY05 to FY08. Strong demand conditions supported sustained pick-up in non-financial private listed companies profit growth during this period. Overall GDP growth during this period sustained at nearly 8% in FY05 to FY08, supported by twin engines of consumption and investment.
In the current cycle these three conditions are missing –consistent private consumption growth, buoyant export growth and healthy profit growth. Private consumption growth slowed to 4.0% in FY24. In FY25 urban consumption is expected to moderate with slowdown in wage growth. This is expected to be balanced by revival in rural demand in H2FY25, post the harvest season. Export growth (merchandise and services) has remained subdued since FY24, rising by 2.6% (in real terms). In FY25, there has been some recovery in merchandise exports. The silver lining has been services export growth which has picked-up pace in FY25. The outlook for global trade remains uncertain with the possibility of global tariff wars reigniting under the Trump administration. Companies profit growth had seen a strong pick-up in FY24, supported by reduction in input costs. In H1FY25, the performance has been mixed with slowdown in sales growth and less support from reducing input costs.
Meanwhile, on the monetary policy front there has been a lot of focus on whether current real policy rates are becoming restrictive. The experience of FY05 to FY08 period is instructive in this regard. Real repo rate (deflated using CPI) averaged at ~1.5%. Repo rate was increased by 175bps during this period. In the current cycle, since FY24 real repo rate has averaged ~1.3%. Hence the present level of repo rate should not have a restrictive impact on the investment cycle. This was also confirmed by RBI’s updated estimate of neutral real rate, revised up to 1.4% to 1.9%. Real policy rate within this range will have neither an expansionary nor contractionary impact on growth.
To conclude, the key missing ingredient for private corporate capex is visibility on demand outlook, both domestic and external and strong profit growth. Continued uncertainty in this regard could keep corporates cautious while adding fresh capacities.
(Gaura Sengupta is the Chief Economist at IDFC FIRST Bank.)
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