Auto sector investment vroom: Sign of a private capex revival?

Tata Motors plans to spend  ₹18,000 crore on its EV thrust by 2029-30.
Tata Motors plans to spend 18,000 crore on its EV thrust by 2029-30.

Summary

  • Large investments lined up by car manufacturers suggest a revival is underway in capital expenditure by India Inc, with a Hyundai IPO plan just the latest talking point. For private capital formation to accelerate, policy reforms need to join forces with a demand boom.

Hyundai Motor India’s upcoming initial public offering (IPO) stands out for more reasons than one. Not only is it slated to be the biggest IPO held in India, with this fund-raiser likely to target 25,000 crore and top Life Insurance Corporation of India’s 21,000 crore, it also speaks of upbeat corporate sentiment that may herald a long-awaited revival in private investment. 

India’s second-largest carmaker has plans to spend 32,000 crore over the next 10 years—partly on General Motors’ Talegaon facility that it acquired, but the bulk of it on its turn towards electric vehicles (EVs), which includes a plan to develop networks for EV charging and component supplies. Hyundai, though, is not the only one. 

Other manufacturers have also lined up large investments to roll out more vehicles, with a shifting mix of fuel-tanks and batteries to run them as we push for cleaner streets. Tata Motors, for example, plans to spend 18,000 crore on its EV thrust by 2029-30, Mahindra and Mahindra upwards of 20,000 crore by 2026-27, mostly on EVs, and market leader Maruti Suzuki 1.25 trillion by 2030-31 on a mix of technology platforms. 

Also read: Why the hybrid boom is funding EVs

While India’s transition to clean energy calls for ploughing in fresh capital, these spending plans reflect broader optimism over demand as well. Much money will go into capacity addition. And given that the auto sector accounts for a substantial chunk of India’s factory output, it will lift corporate spending overall and could set off ripples of capital expenditure across other sectors too.

Improved business prospects are reflected in the optimism of India Inc. Sanjiv Puri, president of the Confederation of Indian Industry (CII) and chief of ITC Ltd, has observed that private investments are taking off and household consumption in India has not only crossed its pre-pandemic level, but is steadily growing, unlike in many other countries. And with global trade expected to do better in 2024-25, industrial growth prospects look bright. 

Also read: Chinese EV-makers are leaving Western rivals in the dust

Private investment in fixed assets such as plant and machinery in nominal terms stood at 23.8% of GDP in 2022-23, up more than 3 percentage points from 2020-21. Money has been invested in various sectors, such as infra-driven cement and steel, apart from fields like electronics, food processing and renewable energy, thanks largely to government incentives. But gross fixed capital formation in the private sector is still below its 27% level of 2011-12. 

Clearly, it need to rise further. With capacity utilization running at some 75%, a wide swathe of businesses may be ready to invest in new assembly lines, etc. No doubt, demand has been patchy in many product markets, with rural India lagging. Yet, with household incomes on an uptrend, old supply capacities cannot suffice for long.

Also read: Auto sales preview: Heatwaves, Lok Sabha elections likely to dent retail automobile demand in May

All through this decade, the heavy lifting of investment to drive the economy forth has been done by the government, which ramped up public capex to put money in the hands of people in the hope of crowding in private investment along the way. With a fiscal pullback now a budget imperative, the Centre needs the private sector to play investor-in-chief. 

A revival in demand, while necessary, may not be all that the economy needs, though. That companies have been reluctant to re-invest much of their recent surge in profits after a sharp cut in corporate tax suggests another kind of confidence gap. Perhaps a renewed focus on factor-market reforms could plug this shortfall and accelerate private capital formation.

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