In the latest union budget presentation, the finance minister placed special emphasis on the need to encourage private sector investment. The finance minister highlighted that catalyzing (crowding-in) private sector investments through public capital expenditure is one of the key goals of the government in its endeavor to attain its long term vision “India at 100”.
In the past one year there have been some brokerage reports emphasizing that a virtuous private capex cycle in India is on the anvil. Most asset management companies also emphasized on revival of economic cycle led by For example consider the following:
2022: The Year of Capex - IIFL Securities
“India is on the verge of a strong capex led growth acceleration, helped by a multitude of factors including a supportive domestic policy environment and a strong commodity cycle. “
“India should see industrial capex pick up in 2022, helped by a pro-business and reforms govt stance, catch up after a long period of underinvestment in the economy, improved RoEs and fortified balance sheets in companies and banks, favourable global commodity prices, and improving central govt fiscal situation enabling capex spending with multiplier focus.”
India Strategy 2022: Enter Economic Supercycle - Jefferies
“Our analysis of the six key components of the economic cycle suggests that conditions are ripe for a repeat of a 2003-10 style (7.3% GDP CAGR then) upturn. Housing upcycle is now in its second year of upturn following a seven-year down-cycle. Pre-sales are booming, while inventory is at eight-year lows. We see housing to be at least a 5-year upturn, capable of driving the broader economy. The other cycles that have convincingly turned are bank NPLs (topped out, banks well capitalized) and corporate profitability. Corporate leverage is at a cyclical low as well. Interest rates will likely move up, but it's unlikely to impact investment activities a-la 2003-10. A gradual increase in the risk appetite among corporate and banks will lead to a broader capex cycle eventually by CY22 end.”
Year ahead 2022: Contrasting narratives and volatilities – HSBC Global Research
“1) Many macro indicators are painting a positive picture for economic recovery (GDP growth rates, tax collections), and prospect of the beginning of a stronger overall growth phase. 2) Prospect of a new phase of investment led growth (which has been largely muted in the past decade). 3) Continued momentum of investments in start-ups and new age companies and even successful public market listings of many such players has the potential to kick start a virtuous cycle of risk taking and adding to the ‘risk on’ momentum of the market, in our view. 4) FY21 recovery has been better than expected and FY22 and FY23 earnings growth outlook seems strong.”
India Economics: On path for a full-fledged recovery – Morgan Stanley
“We expect a full-fledged growth recovery with all drivers firing and macro stability indicators remaining in the comfort range. We believe that a pickup in investments underpinned by structural reforms will help to create a virtuous cycle of sustained high productive growth.”
Some brokerages though warned against unfounded exuberance for the private capex. For example, Edelweiss and JM Financial did not support a meaningful pickup in private capex.
The primary argument behind higher capex projections are (1) Significant deleveraging of corporate balance sheets; (2) Need to upgrade in view technology advancement and popularization of digital channels; (3) government incentives (PLI etc.); and (4) better risk taking capacity of banks; (5) strong housing cycle led by lower rates and improved affordability; (6) Focus on import substitution; (7) Climate change driven new capacity building; and (8) China+1 policy of western nations driving export growth from India; etc.
Whereas the arguments against any material acceleration in private capex are rather simple – (1) Lack of a driver for consumption growth which usually catalyzes investment cycle; (2) rate cycle already bottoming; and (3) poor capacity utilization levels.
Notwithstanding the arguments, it is important to note that many sectors in India have already witnessed meaningful capacity addition in the past 5-6years and may not need new capacities in midterm. Some industries like steel and renewable energy have announced major capacity additions in the last couple of years, execution of which might happen in the next few years.
A cursory analysis of 740 listed companies with over Rs 100cr of gross block as on 31 march 2021, suggests that one third of these companies have added more than 100% to their gross block in the past six years. Another one third have added 50% to 99% to their gross block in the past six years. The rest one third have added 10% to 49% to their capacity. Cement, Chemicals, steel, textile, sugar, pharma, auto ancillaries, and consumer durable have seen maximum capacity addition in this period. Besides, tyre, paints, paper, packaging and IT services have also seen meaningful capacity building.
Overall, the gross block of these 740 companies increased from Rs21.56trn to Rs42.42trn, an addition of Rs20.85trn. This is not very different from the gross budgetary support for capital expenditure in the central budget.
The point is that private capex has been happening at a steady pace for the past six years and it may not be a good strategy to expect any meaningful acceleration in next couple of years.
