Capital expenditure by India’s private sector being back with a bang seems to be the flavour of the season for a large section of India’s policymakers and leaders in the private sector. India’s central bank isn’t far behind.
In a report last month (Private Corporate Investment: Performance and Near-term Outlook), the Reserve Bank of India (RBI) saw a material improvement in private capex outlook. The report said of the total capital investment during FY23, about 40% is expected to be spent in FY24 and the envisaged total cost of the projects financed by banks/financial institutions reached a new peak during FY23 since FY15.
There are reasons for the central bank’s optimism. Consumer confidence, as captured by the RBI Consumer Confidence Survey, has been rising consistently in recent months, which is obviously helping the economy to take advantage of the twin balance sheet advantage—a banking system that has overcome its bad debts problem (banks’ impaired loans are tracking at 11-to-12-year lows) and is primed to lend, and a corporate sector that has deleveraged substantially (corporate debt-to-GDP is at a 16-year low), and is ready to spend.
Another contributor to the optimism is the production-linked incentive scheme, which, according to a Crisil study, will account for 13-15% of capex in the next three years.
There’s more. India Ratings and Research (Ind-Ra), which looked at the industrial entrepreneur’s memorandum (IEM) and Business Expectation Index (BEI) data of 2005 to 2022, suggests a correlation between IEMs and BEI data. The BEI recovered sharply to 126.2 in 2021 and to the highest level ever of 136.1 in 2022, though IEMs in 2022 were disappointing because of the Russia-Ukraine conflict.
Taking a cue from the past, Ind-Ra believes if BEI sustains at 120 or above for a few more quarters along with no further deterioration in the global geopolitical situation, then private investment proposals/filing of IEMs could rise significantly, leading to the beginning of a new private capex cycle.
That, undoubtedly, is a great mindset to be in, but a reality check may give a more nuanced picture. The private sector has announced lower investments in new factories, plants, and other new projects in the three months ending September than previously. The total value of new project announcements from the private sector was Rs 0.8 trillion, according to data released by the Centre for Monitoring Indian Economy. This is a 79.2% decline from the Rs 3.8 trillion during the same period last year. It has fallen 85% from the Rs 5.3 trillion worth of new projects announced in June.
Total private-sector projects sanctioned by Indian banks and financial institutions, when the government-driven infrastructure sector is excluded, have grown by only 1.8% since the current government took office in 2014.
Within industry, manufacturing in particular continues to disappoint; growth rates have been consistently behind both overall GDP and industry growth numbers for five quarters in a row. In fact, even while the economy continues to expand, the contribution of private investment has consistently declined since 2011-12.
The picture is not bright in bank credit growth numbers as well. In fact, the RBI’s data on sectoral deployment of bank credit shows that credit to industry slowed down to 6.1% in August 2023 from 11.4% in the same month last year. It should have been much higher if capex was widespread. After adjusting for inflation, there has actually been a significant long-term degrowth in industrial credit.
A research note by Nikhil Gupta and Tanisha Ladha of Motilal Oswal says that for the period between April and June, corporate investments fell 6.2% in comparison with April-June 2022. They stood at 12.3% of GDP, the lowest in the first quarter of any year in the past decade. Further, the share of corporate investments in the overall pie was lower than their pre-Covid share of around 50%.
Let’s look at capacity utilisation numbers. While there has been a general increase in the figures to over 75%, which is a welcome sign, the fact is that cement is the only sector where the present utilisation of 70% is higher than its past decadal peak of 69% in 2018-19.
Overall, public capex is doing its fair share of pushing the capex line item higher and that is having some multiplier effect into other indicators as well. But private capex has to get more broad-based and more entrenched as the bulk of the heavy lifting has to come from the private sector. While there are some signs of capex revival, it is still skewed in favour of a few sectors and a few big players contributing to the bulk of investment in the economy. The small and mid-sized players continue to remain on a back-foot given the economic uncertainties. They need handholding.
Ultimately, however, the biggest incentive is adequate demand. The picture isn’t too pretty there. RBI data shows in 2022-23, the net financial assets of households fell to 5.1% of the GDP—a 47-year low—which means households have been financing consumption by borrowing and spending more. That needs to change. The economy faces a daunting challenge from subdued consumer demand that has the potential to derail any nascent private capex revival, especially in an environment fraught with uncertainties.
There are significant challenges for sustained consumption recovery from structural labour market issues—the lack of any meaningful employment recovery in industry ex-construction sector and among the younger population remains a key concern. The government should perhaps evaluate each sector, find out what is holding back investment and try to resolve them.