Signs of green shoots in capital expenditure seem to have enthused the markets. The BSE Capital Goods index is up 14.87% in the past year compared to a rise of 6.78% in the BSE 500 index.

The fact is that net fixed asset (NFA) growth of Indian companies has stepped up to about 5.8% in FY19. NFA growth indicates the additions companies are making to their fixed assets.

NFA growth stood at 4% in FY18 and had fallen from 7.8% in FY17.

In fact, the chart alongside shows that NFA growth has come off from earlier years. This suggests that India Inc. is still worried about a demand pickup and is shying away from making fresh capital investments in a big way.

Besides, much of this pickup in investments is not due to an increase in asset purchases as investors would have liked. The fact is that Indian companies have been rather cutting back on asset sales. As a result, this has tended to perk up the NFA growth rates.

“A key factor helping overall growth is the declining trend of asset sales and write-downs. If we include only companies that grew their NFA, then the aggregate capex addition dipped during FY19 as compared to FY18," noted ICICI Securities Ltd in a note to clients.

Additionally, the brokerage firm notes that public sector units, particularly in energy and utilities, grew their NFAs at 10.8% in FY19. So, if one excludes the public sector investments in fixed assets, private sector NFA growth shrinks to a lower rate of just 4.4% in FY19.

Also, National Company Law Tribunal cases have led to brownfield investments of 80,000 crore, point out ICICI Securities’ analysts in their note. This naturally puts a cap on greenfield expansion, and NFA accretion as a result.

The problem is that capex may remain muted in FY20. While some large-ticket private sector capex announcements have been made in FY19, many new projects could take a while to get off the ground.

“We believe conversion to orders will be back-ended, likely over H2FY20 or more towards FY21, given the state of clearances as well as multi-year capex plans like the 70,000 crore Adani RE & Data Centre," noted analysts at Axis Capital Ltd in a recent note.

The brokerage firm also added that FY19 announcements would have been bunched up due to the impact of demonetization and the goods and services tax in prior years.

The other issue is that aggregate demand is showing signs of deceleration. Sales of automobiles and two-wheelers have slowed down in the last few months. Besides, there is little evidence of a broad-based recovery in some of the macro indicators.

“Early cycle indicators observed during the previous capex cycle (FY02–FY08), such as IIP–Manufacturing, IIP–Capital goods, IIP–Primary goods, continue to show downtrends. IIP Infra and construction goods have also started slowing down after encouraging trends in CY18," said ICICI Securities in its note. IIP stands for the Index of Industrial Production.

Clearly, much more broad-based evidence is required that capex will indeed pick up in the coming quarters.

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