Capex: Are India Inc’s animal spirits back?

Ford factory in Chennai
Ford factory in Chennai


The private sector has been shy of investing for many years. But 2023-24 could be different

CHENNAI : Last time corporate India unleashed its animal spirits, the economy grew at its fastest pace ever. That was almost two decades ago.

The period between 2002 and 2008 saw huge investments from private companies as they expanded their manufacturing footprint and acquired companies overseas. Gross fixed capital formation (GFCF), a measure of investment in the economy, touched an all-time high of 36% of GDP in 2007-08 (at current prices) and averaged a heady 34% during the period. It’s not surprising that the economic growth accelerated and averaged 8.8% during these years.

The global financial crisis of 2008, and the runaway inflation that India faced in the following years, on account of a loose fiscal policy, killed demand and slowed the economy. Growth fell to a low of 5.5% in 2012-13. This sent India Inc into a hibernation—a really long one.

Graphic: Mint
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Graphic: Mint

GFCF has steadily declined and is currently hovering at 29%. What is more concerning is that the share of machinery and equipment in the overall GFCF has fallen from 18.4% in 2011-12 to 13.8% in 2021-22, as per the first revised estimate of national income, consumption expenditure, saving and capital formation for 2021-22, released in February this year.

The Indian government, realizing the importance of private investment in accelerating economic growth, has been making various attempts at ending this hibernation. The government cut corporate tax significantly in 2019 in the hope that it will encourage investment. Second, it focussed on public capital expenditure (capex), thinking this can ‘crowd in’ private investments. The 2023-24 budgeted capex of 10 trillion is thrice that of what was spent in 2019-20. The Centre has also pushed the states to invest.

However, all these efforts to pump prime private capex failed to stir India Inc much. The share of private corporate entities in GFCF in 2021-22 had declined to 36%. Even as late as 2015-16, it was much higher at 41.3%.

But there may now be light at the end of the tunnel. The conditions are ripe for large-scale private investments today. India Inc, experts say, cannot ask for a better time to start investing again. While investments have indeed started trickling in, this trickle needs to swell into a flood if India has to witness another high economic growth phase.

Broad-based revival?

The government of India disagrees that the extent of private investment today is just a trickle.

“The expansion of private capex in 2022-23 is broad-based with an increase in most sectors," said V Anantha Nageswaran, chief economic advisor, government of India. He pointed to the Index of Industrial Production (IPP), which shows that in 2022-23, the capital goods index rose by 12.9% and infrastructure/construction goods index rose by 8.4%. This fiscal year, too, these indices have risen by 6.5% and 14.5%, respectively, till the month of May. Import of capital goods, he added, increased by 22% in 2022-23 and by 10.7% in the first two months of the current fiscal.

But not everyone concurs. “Private investment is definitely underway and that is an encouraging sign, but it is selective in sectors such as cement, auto, oil & gas, green investments and those driven by production-linked incentives (PLI) schemes," said Hetal Gandhi, director of research at Crisil Market Research and Analytics.

This is also borne out by research from the Bank of Baroda (BoB). Researchers at the bank studied data around new projects announced in the first quarter of 2023-24 and compared them with those in the last eight years. The data comes from the Centre for Monitoring Indian Economy (CMIE), a business information company.

While a U-shaped recovery is visible (see chart), a closer look underlines a more nuanced story. Of the new projects worth 5.96 trillion announced in the first quarter of 2023-24—the highest in five years—almost 74% of the amount is from the airline sector, which ordered new planes by the hundreds. The power sector accounted for 10% of the new projects. Chemicals (8%), machinery (3%) and auto sector (2%) had a relatively lower share.

Bond market borrowings and bank credit are also good indicators. BoB Research reveals that in the first quarter of this year, about 89% of the funds raised in the bond market were not by manufacturing companies but by financial services players. Similarly, bank credit growth for the industry in May 2023 over the same month last year saw just 6% growth. It would have been much higher if capex was widespread.

Peak capacity

Nonetheless, nearly everyone believes that conditions for a large-scale revival in private capex are ripe. Why is that?

Consider this: one of the major reasons for India Inc not investing was the surplus capacity it was sitting on. That surplus, it appears, is fast getting used up. According to the Reserve Bank of India (RBI), India’s central bank, average capacity utilization of the manufacturing sector had crossed 74% in the second quarter of 2022-23.

“Look closer and you will see that capacity utilization in some critical sectors has surpassed the decadal average and is just shy of the peak levels," said Gandhi. For instance, the present capacity utilization of 82% in the steel sector is closer to the previous peak of 88% in 2010-11.

In the case of passenger vehicles, the gap is even narrower—79% versus 80% (2010-11), while in the case of commercial vehicles, it is 74% as against the peak capacity utilization of 77% (2018-19). Cement, as per Crisil’s research, is the only sector where the present utilization of 70% is higher than its past decadal peak of 69% in 2018-19.

This has been possible as domestic offtake has been good, thanks to a strong revival in consumption which, in 2022-23, grew by 7.5%. Consumer confidence, as captured by the RBI Consumer Confidence Survey, is consistently rising in recent months. Overseas demand has also seen a sharp spurt with merchandise exports touching an all-time high of $447 billion last fiscal.

The other important reason for the industry’s reluctance to invest was high debt levels. India Inc found itself heavily leveraged after massive expansion of capacity, both organically and inorganically, a decade back. A sharp downturn followed. Net debt to earnings before interest, taxes, depreciation, and amortization (Ebitda) was as high as 2.9 times even as late as 2016. By the end of 2021-22, it had dropped to 1.6 times. Overall credit profile of India Inc has substantially improved. Debt upgraded by all credit rating agencies in the first quarter of 2023-24 was 21 times higher than those that were downgraded, a study by Crisil shows.

Improved demand, lower interest costs and declining commodity/fuel prices have also ensured good profitability for businesses. A study by Mint shows that in the first quarter this fiscal, Nifty 50 companies will report the strongest earnings in seven quarters. Net profit of 44 of the 50 companies in the index is expected to grow by 25.3% over the same period last year, on a net sales growth of just 6.2%.

This also means that the industry has managed to handle the changes in the market that consumed a lot of its efforts. According to R Seshasayee, executive vice-chairman, Hinduja group, and a former president of the Confederation of Indian Industry (CII), the market is today evaluating companies very differently. Companies which have a strong Ebitda multiple and profit margins are preferred. Those that are asset heavy and making large investments are frowned upon.

“The need to strengthen the moat is stronger," he said. Companies did this by introducing new products, investing in technology, deepening distribution and strengthening branding. That apart, consumer spending is evolving. Their basket of spending is shifting from manufactured goods to services. Companies were forced to tackle these challenges before looking at expansion and this has changed the attitude of the boards.

“In the bubble years of 2002-08, the mood in the boardroom was one of going out and conquering the world. Of late, boards are asking more questions before approving investments," he said. Having strengthened the moat, companies are once again in a better frame of mind to invest.

Add to this a banking system that has overcome its bad debts problem and is primed to lend. As per the RBI’s latest Financial Stability Report, net non-performing assets of scheduled commercial banks as of March 2023 is 1%—a decadal low.

The central government’s PLI scheme, which offers incentives worth 1.97 trillion, for improving India’s self-reliance across 14 sectors, is also boosting private capex. The scheme has so far received 733 applications and according to Rajesh Kumar Singh, secretary, department for promotion of industry and internal trade (DPIIT), it has realized investments worth 62,500 crores as of 2022-23. A Crisil study says that the scheme will account for 13-15% of capex in the next three years.

“India is at the cusp of a virtuous cycle. Green shoots are already visible, and we expect this virtuous cycle to be long, thanks to the government’s focus on infrastructure spending, which has not only reduced the cost but also enhanced the ease of doing business," said R. Dinesh, president, CII.

The next steps

The central government has been steadfast in its bid to pump-prime private investments. In September 2019, it cut corporate tax sharply by almost 10% at a cost of 1.45 trillion (0.7% of GDP) to the exchequer. Corporate tax, as a percentage of the GDP, dropped from 3.59% in 2018-19 to 3.03% in 2022-23.

However, India Inc was still sitting on excess capacity. Many experts faulted the government for the rate cut and said it could have, instead, left money in the hands of the people. More disposable income would result in higher spending, beginning a cycle of higher demand and better capacity utilization for companies.

“When the economy was at various stages of the lockdown and supply chain was disrupted, distributing large amounts of money to individuals would not have helped boost the economy’s demand," argued Nageswaran. Moreover, when the private sector was risk averse amid global uncertainties, the government had to take up the responsibility to bring back the animal spirits in the economy by crowding in private investment, he added.

The government focussed on creating productive assets and improving business sentiments in the economy. The Centre’s capex increased from 12% of total expenditure in 2017-18 to 22% in 2023-24. It also pushed states to invest in capex by offering interest free 50-year loans. In 2022-23, such loans worth 95,147 crore were approved. In 2023-24, 1.35 trillion has been allocated for the scheme. That apart, the Centre has been giving additional tax devolution funds (Centre gives states their share of taxes monthly. Last year, it transferred double that share in a month twice and again in June this fiscal) to the states in a bid to get them to front load capex.

What more should be done to accelerate private investment? Not much, replied former RBI governor C Rangarajan. “The government has done a lot at the macro policy level to crowd in private investment. What it can do now is evaluate each sector, find out what is holding back investment and resolve them," he said.

Some industrialists, meanwhile, think that India Inc’s animal spirits have already awakened. Sunil Bharti Mittal, founder and chairman of Bharti Enterprises, is one of them. His company, India’s second largest mobile telephony player, is investing over 20,000 crore every year, he said in an interview to Business Standard in June this year.

If this optimism spreads across the industry, India could enter a phase of high economic growth.

(Gireesh Chandra Prasad contributed to this story.)

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