Can govt’s infra push revive private capex?

Economists say the increase in capital outlay for FY25 is lower than the run-rate in previous years. (Mint)
Economists say the increase in capital outlay for FY25 is lower than the run-rate in previous years. (Mint)


The government had amped up its capital expenditure for infrastructure at a challenging time when private sector spending had subdued

Ahead of the upcoming general election, expectations from the interim budget for FY25 were not high, but policy continuity, especially on infrastructure spending, was critical. After all, this theme has been a key sentiment driver for investors in shares of infra companies. 

Finance minister Nirmala Sitharaman has not offered them much to cheer. But the good news is that the capital expenditure outlay proposed for FY25 is up 17%, at 11.11 trillion.

The details are not as exciting, though.

The allocation for railways at 2.5 trillion is only marginally higher than 2.4 trillion (revised estimate FY 2023-24). The finance minister has proposed implementation of three major economic railway corridor programmes–energy, mineral and cement corridors; port connectivity corridors; and high traffic density corridors. 

These projects have been identified under the PM Gati Shakti scheme for enabling multi-modal connectivity and are expected to improve logistics efficiency and reduce cost. Shares of key railway companies such as Texmaco Rail and Engineering Ltd, and Titagarh Rail Systems Ltd were mostly unchanged on Thursday.

The government has proposed to set aside 2.7 trillion for road transportation and highways, but again, this is only marginally higher than revised estimates for 2023-24. 

“Except for national highways, which witnessed softening of project awards due to FY24 being a pre-election year and high NHAI debt levels, other areas such as transmission projects, addition of renewable capacity, have witnessed strong tendering activities," said Priyankar Biswas, India analyst for infrastructure, logistics, capital goods and metals and mining at BNP Paribas. 

The budget allocation for the National Highways Authority of India is up only 0.6% (based on the budget estimate for FY25 versus the revised estimate for FY24), which reinforces the view that high NHAI debt makes it challenging to increase allocation for highways, Biswas added.  

On the bright side, defence allocation has been increased by over 9% to 1.7 trillion. This is expected to augur well for companies such as Bharat Electronics Ltd.  

To fuel growth and retain its position as Asia’s fastest-growing economy, India’s thrust on infrastructure spending is important. Increase in infrastructure investment provides a critical push to the potential growth of the economy, as it is anticipated to create a ripple effect.  

Amit Anwani, analyst at Prabhudas Lilladher, sees developments in the defence, railways, and energy sectors benefiting various industries, with a strong possibility of positive spill-over effects on other sectors such as cables and fittings. 

Little wonder then that in the past year shares of Larsen & Toubro Ltd, Bharat Heavy Electricals Ltd, ABB India Ltd, Siemens Ltd, Bharat Electronics Ltd, Thermax Ltd, Praj Industries Ltd, Texmaco Rail, Titagarh Rail, and BEML Ltd have risen by as much as 44-401%.

This optimism stems from the fact that the government amped up its infrastructure capex at a challenging time when private sector spending remained subdued. In its December quarter (Q3FY24) earnings conference call, sector bellwether Larsen & Toubro’s management said they were seeing green shoots in private capex.  

“Over the years, India Inc’s balance sheet is on the comeback trail with an improvement in the ability of borrowers to borrow and lenders to lend," explained Nitin Raheja, executive director, Julius Baer India. This, coupled with earlier government initiatives, has kept the capex momentum chugging, he added.  

Meanwhile, economists point out that the increase in capital outlay is lower than the run-rate seen in previous years. However, given the high base, this is not entirely surprising. 

According to Sonal Varma, managing director, chief economist-India and Asia ex-Japan, Nomura, capex is expected to rise 16.9% year-on-year in FY25 versus 28.4% in FY24, which still shifts up the capex-to-GDP ratio to 3.4% in FY25 from 3.2% in FY24. 

“In recent years, private capex has been weak, so public capex was a driving force. Now with private capex likely to pick up, the government is slowly stepping back," said Varma.

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