Animal spirits revival: When will private capex roar again?

Indian factories, by and large, are still some distance from being stretched to their limits in fulfilling demand.
Indian factories, by and large, are still some distance from being stretched to their limits in fulfilling demand.


  • An RBI report on the state of India’s economy points to conditions being in place for a private capex revival. But we have seen many stirrings that flattered only to deceive. This time, let’s hope it plays out. As a Keynesian policy push winds down, animal spirits are what we need.

India’s wait for a revival in private capital expenditure has proven inordinately long. In this context, the Reserve Bank of India’s (RBI) latest State of the Economy report strikes an optimistic note. “Expectations for a fresh round of capex by the corporate sector to take the baton from the government and fuel the next leg of growth are mounting," it notes. Its choice of words suggests an overhang of uncertainty. After all, past hopes have been deflated too often. So all optimism on this count must be laced with caution. That said, conditions are indeed supportive, with our post-pandemic economy on the verge of marking three dots on a trot of about 7% annual expansion (adjusted for inflation), despite global headwinds. Corporate balance sheets are strong, as are those of banks. Further, inflation has eased, and should RBI feel assured of pinning it down at 4% or so, the “bedrock" for sustained economic growth would begin to materialize that Governor Shaktikanta Das referred to in his last policy speech. If RBI succeeds, we could look forward to a drop in duration-risk premia and structurally cheaper credit for all as a result. These factors, though, could yet fail to overcome other determinants of private capex, such as the utilization of current production capacity in particular and ‘animal spirits’ in general.

Indian factories, by and large, are still some distance from being stretched to their limits in fulfilling demand, and while consumer markets are expanding, an uneven pace across sectors and price slabs appears to have held back investment in add-on facilities, even as greenfield projects stay largely in sunrise fields. A recent RBI survey estimated that only 74% of capacity was in use, at last count, a level below the 80% reckoned to push companies into expansion gear. RBI’s economy update offers a broad overview. Fixed asset growth is already evident in oil and gas, it says, as also chemicals. In the steel sector and automobiles, however, it has “underwhelmed." Capex plans of the power sector are the “most ambitious," the report notes, but “leverage is high among distribution companies." Electricity has structural troubles, of course, which may persist unless production incentives are better aligned with demand. This sector’s principal focus has been on renewable energy, which has had much policy attention as the country aims for 500GW of it by 2030, and the RBI report presents it as a corporate opportunity. “Overall, the corporate sector must get its act together, ready to relieve the government of capex heavy lifting," it says, “and take advantage of the space ceded in financial markets by a lower budgeted borrowing programme and the easing of borrowing costs that has already begun in response to the Interim Budget for 2024-25…."

The government’s Keynesian role as heavy lifter is set to recede as it reduces its fiscal deficit after the pandemic expansion, aiming for 5.1% next fiscal and under 4.5% of GDP by 2025-26. Central capex at 11.1 trillion for 2024-25 can’t be enlarged much. To the extent uncertainty still haunts large private investment decisions, however, what the Indian economy needs is a revival of what Keynes called animal spirits. By this, he meant the qualitative stuff that animates investors; or, in the economist’s words, a “spontaneous urge to action" that isn’t “the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities." So, after a succession of false stirrings in recent years, will it finally happen next fiscal year? We’d be cautiously optimistic.

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