Brokerage firm UBS Securities India Pvt. Ltd estimates that overall capex in fiscal year 2020 may grow 6%, trailing the 20% increase in FY19.
Brokerage firm UBS Securities India Pvt. Ltd estimates that overall capex in fiscal year 2020 may grow 6%, trailing the 20% increase in FY19.

Will the capital expenditure cycle revive after the general election?

  • In the recent interim budget, the Union government announced direct income support of 6,000/year in three equal instalments for around 120 mn farmer households
  • Past data indicates that even after the polls, overall capex does not necessarily revive, and even when it does, the improvement isn’t sharp

How far is India from witnessing a turnaround in its capital expenditure (capex) cycle? No, the answer to this question is not “just one general election away". Uncertainty around the general election is often cited as a hurdle for fresh investments, especially by companies.

However, past data indicates that even after the polls, overall capex does not necessarily revive, and even when it does, the improvement isn’t sharp.

An analysis by broking house Nirmal Bang Securities Pvt. Ltd shows that in the past decade while gross fixed capital formation (GFCF) as a share of gross domestic product (GDP) did improve in some years, the improvement was marginal. On some occasions, GFCF—a measure for investments—fell as a proportion of GDP in the year after the election.

(Sarvesh Kumar Jain/Mint)


“We believe the capex recovery is going to be a slow and a long drawn-out process, with stops and starts. Election cycles typically act as a drag on capex cycle recovery, with the government prioritising revenue expenditure over capital expenditure," Nirmal Bang said in a note to clients on 26 February.

Economists say that populist measures such as an increase in the annual quota of subsidized cooking gas cylinders, power tariff cuts and farm loan waivers were announced ahead of the 2009 and 2014 elections to woo voters.

In the recent interim budget, the Union government announced direct income support of 6,000/year in three equal instalments for around 120 million farmer households. This scheme is in addition to farm loan waivers and other income support schemes already announced by several states.

One should not be surprised if similar schemes are announced after the 2019 election as well. “In an election year, the risk of extra spending by the government on welfare schemes, post-elections, to thank the voters is always there," said an economist, who did not want to be named.

Brokerage firm UBS Securities India Pvt. Ltd estimates that overall capex in fiscal year 2020 may grow 6%, trailing the 20% increase in FY19. “This reflects deteriorating spending quality and a skew towards social welfare spending. In our base case, we expect gradual capex recovery from late FY20 onwards (March 2020 quarter onwards)," said Tanvee Gupta Jain, chief India economist at UBS Securities India.

As for Indian companies, low capacity utilization levels, a focus on deleveraging and concerns about a global economic slowdown could keep them from increasing capital spend in the near term.

Meanwhile, those cheering growth in the GFCF component of the dismal December quarter GDP data also need to be cautious. Economists expect this silver lining to fade in quarters to come.

“Going by the latest GDP data, gross fixed capital formation, i.e. investments, continued to register double-digit growth in the December quarter.

However, we expect this strong growth in real fixed capex seen over the past few quarters to likely decelerate going forward, as the government lowers capital expenditure (given budget constraints) and investment decisions get delayed due to political uncertainties ahead of the elections," added Jain of UBS .

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