India’s gross capital formation (GCF) grew at a moderate pace of 6.9% in FY23 as against 20.6% in FY22, largely due to a sharp contraction recorded in the “industry sector’s” GCF, data from the ‘National Accounts Statistics 2024’ showed.
The contraction within industry was the most pronounced in manufacturing, followed by construction; and was mostly due to low GVA growth amidst high interest rate scenario, say economists.
In the first three quarters of FY24, the GFCF grew at 10.2% as against 7.8% growth recorded during the corresponding period of FY23. The National Statistical Office’s (NSO) has projected GFCF in the entire FY24 to grow at 10.2%, much higher than 6.6% growth recorded in FY23. Also, GFCF’s share in the GDP is likely to touch 34.1% in FY24, the highest in 12 years.
They expect GCF to perform well in FY24 as overall capex expectedly remained strong. “While there is a government’s emphasis on capex-driven growth, particularly focusing on public expenditure, there are initial signs indicating a potential upturn in private sector capex,” said CareEdge’s Mukherjee. Noteworthy increases in project announcements during Q4, coupled with improving business sentiment, underscore the private sector’s intent towards undertaking capex initiatives, he said.
The industry’s GCF contracted 3.5% in FY23, while that of services grew 11.8%. Industry’s GCF, in absolute terms, accounted for 32% of the overall GCF, and services’ comprised 60%. The agriculture GCF (8% of overall), on the other hand, grew at a seven-year high of 17.7% in FY23.
GCF, by definition, is the total value of gross fixed capital formation (GFCF), changes in inventories (elements of working capital), and acquisitions minus disposals of valuables. The GFCF predominantly captures capital expenditure, and is part of the national income (or GDP) data.
The manufacturing GCF had contracted 5.4% in FY23, at the steepest pace in nine years. This came amidst a 2.2% contraction in gross-value-added (GVA) during the year. The construction GCF, meanwhile, contracted 2.9% in FY23.
“GCF grew slowly or at negative rates for manufacturing in construction for two reasons. First, the GVA growth in manufacturing was negative; and second, the base effect was there for both the segments,” said Madan Sabnavis, chief economist, Bank of Baroda, while adding that the capacity utilisation during FY23 was also low which obviated the need to invest.
Sarbartho Mukherjee, senior economist at CareEdge Ratings, however, said that industry’s GFCF (within GCF) contracted merely 1.5% in FY23. “Therefore, the contraction observed in GCF during FY23 is likely attributed to a decline in the working capital component within the accounting framework,” he said.
The impressive 11.8% growth recorded in services’ GCF – on a low base – was led by ‘trade, repair, hotels and restaurants’, followed by ‘transport, storage, communication & services related to broadcasting’, and ‘real estate, ownership of dwelling & professional services’. All three-sub segments grew at 19%, 11.8% and 10.8%, respectively. ‘Public administration and defence’ segment grew at 13.7% on year in FY23.
“That said, in FY23, services capex as a share of overall was still below the pre-Covid 19 period average that exceeded 70% between FY18-20,” noted Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership ( I-SEC PD).
Anitha Rangan, economist, Equirus Securities said that in FY24, GCF from the agriculture sector could have been “somewhat modest” this year, construction activity is likely to have been better led by real estate, and services in trade and hotels likely saw some moderation from high base.
In the current financial year, there is scope for further rise in capex as a share of GDP, and upturn in real estate cycle and pick up in private capex could be catalysts, says I-SEC PD’s Upadhyay.
In the first three quarters of FY24, the GFCF grew at 10.2% as against 7.8% growth recorded during the corresponding period of FY23. The National Statistical Office’s (NSO) has projected GFCF in the entire FY24 to grow at 10.2%, much higher than 6.6% growth recorded in FY23. Also, GFCF’s share in the GDP is likely to touch 34.1% in FY24, the highest in 12 years.