Capex plans shelved again as covid rages2 min read . Updated: 12 Oct 2020, 02:40 PM IST
Capex by 150 of BSE200 firms had declined 5.31% from a year ago in FY20
The pandemic has created a perfect storm for corporate India, which was already pruning its capital expenditure plans to cope with sluggish growth when the coronavirus crisis struck in March.
A Mint analysis of 150 firms in BSE 200 showed that capex by these companies declined 5.31% from a year ago to ₹4.15 trillion in FY20. Of this, capital spending by 20 of the 30 members of the BSE’s benchmark Sensex had fallen sharply by 12.3% to ₹2.07 trillion in the year to March. The review excludes banks, financial services and insurance companies as they have a different revenue model.
The widespread disruptions from covid have added more pressure on capex plans of firms in the first half of fiscal 2021, according to analysts.
“Companies were already under stress even before the covid outbreak. Consumer demand was hit after goods and services tax (GST) was introduced. Companies, especially those in smaller segments, took some time adjusting to the new taxation regime before making any major investment decision. Overall earnings were impacted with business and consumer demand declining post-GST in the past few years," said Dhiraj Sachdev, managing partner and chief investment officer, Roha Asset Managers.
“Liquidity with large corporations and in the banking system for lending to good projects for capex is not an issue. It is the pandemic-led uncertainty, low utilization of capacity and shortage of manpower due to the lockdown that has led to the curtailment of capex," Sachdev said, adding private sector capex is expected to stay muted in the medium-term but recover gradually.
The slump in consumer demand had sent the government scrambling to boost investment and consumption through a raft of measures, including a tax cut for corporates in September last year.
“Private sector balance sheet participation in infrastructure and real estate development is largely missing except for a few names which is a key impediment for a large scale pickup in the private capex cycle," said Vinod Karki, equity-strategist at ICICI Securities.
Private firms tightened the purse strings in FY20 with capex spending by 131 private companies (in BSE 200) down by 9.77% to ₹2.77 trillion. Among BSE 200, 19 state-run firms reported a capex of ₹1.39 trillion in FY20, a 6.11% increase from a year ago.
“India’s capex/revenue has been structurally declining over the decades (from 45% in the 1980s, 35% in the 1990s, 25% over 2000-10 and 22% in 2010-20). In fact, every crisis has structurally lowered the capex further as a share of government revenues," Amar Kedia and Chirag Dave, analysts at Emkay Global Financial Services, said in a report.
According to Kedia and Dave’s estimates, India does not have the fiscal space for counter-cyclical infrastructure-driven stimulus of 5-15% of GDP as the debt overhang is not transient and may haunt till FY25.
Alternative funding options such as specialized domestic financial institutions to leverage funds and multilateral funding are still small. They expect infrastructure spending to stagnate without even considering execution challenges.