Private sector capex to plunge 20-26 per cent this fiscal: Report

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Published: July 14, 2020 3:49 PM

This is because of the huge gap in productivity levels between India and China and the presence of other highly competitive suppliers like Vietnam, Thailand and Indonesia, which are likely to limit India's ability to acquire a significant portion of China's market share even in the medium-term.

In fact, the pandemic outbreak and ensuing national lockdowns have crippled the economy, making coprorates and individuals risk averse.

Private sector capex is set to contract by 20-26 per cent this fiscal due to COVID-19-pandemic-led business disruptions, and investments are unlikely to recover meaningfully before FY25, as per a report. Capital spending by corporates will pick up by 15-20 per cent next fiscal, boosted primarily by the low base effect, according to an India Rating report on Tuesday.

It also warns that in the absence of a broad-based pick-up in domestic and external demand, faster resolution of stressed assets and deep structural reforms, private sector investments are unlikely to recover meaningfully before FY25.

In fact, the pandemic outbreak and ensuing national lockdowns have crippled the economy, making coprorates and individuals risk averse. As uncertainties around demand recovery have persisted and the deleveraging process is yet to kick start, the private sector capex growth has remained mute or low- clocking only 5 per cent annual growth since FY17. Since then, growth in overall gross fixed capital formation continued to fall over FY18-FY19, the report said.
Corporates’ capacity utilisation level continues to hover below 75 per cent since the last round of growth capex between FY12 and FY14. Weak demand growth, even prior to the pandemic outbreak, resulted in shortfalls in cash flow generation, thus delaying their deleveraging.

“While capacity utilisation will take at least another four years to peak, broad-based deleveraging will take another six to seven years,” the report said, adding this will have the maximum impact on “capex this year, which may contract by 20-26 per cent due to the COVID-19-led business disruptions, before growing 15-20 per cent next fiscal year”.

Expecting low capex intensity sectors to be early movers and capital intensive sectors to see prolonged wait, the report noted. Auto and auto ancillaries, pharmaceuticals, consumer goods and cement three sectors standout as in these segments, technological innovation, regulatory developments and changing patterns of consumer demand will prove to be the important drivers of capex spending, it added.

The deleveraging process for the capital-intensive sectors such as metals, infrastructure and power, will be delayed further, it said. “Uncertainty over the medium-term demand outlook – aggravated by the pandemic – will result in corporates taking on a cautious approach towards capex outlay.

“Most issuers that do undertake capex will do so in a modular form. Although this will limit the benefits of economies of scale, it will enable them to calibrate their capex outlay to the evolving demand scenario,” the report said.

Meanwhile, it also said that although global supply chains are likely to de-risk themselves from China over the long-term, domestic corporates are unlikely to benefit from such a move in the near-term. This is because of the huge gap in productivity levels between India and China and the presence of other highly competitive suppliers like Vietnam, Thailand and Indonesia, which are likely to limit India’s ability to acquire a significant portion of China’s market share even in the medium-term. And that any gains, however, will be insufficient to stimulate corporates’ investment appetite, the report added.

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