Broad-based private sector capex may take time till Q4 to revive: Experts

This is despite the announcement of expansion plans of some large companies, and is the outcome of the second wave

Broad-based capital expenditure by the private sector may have to wait till at least the beginning of the fourth quarter of the current financial year even as some large companies have announced expansion plans.

Indian conglomerates have announced several investment plans which include Vedanta announcing $20 billion investments in doubling its capacity, Reliance Industries $10 billion in renewable energy and the Adani group planning to invest in the petrochemicals sectors. The Tata group has also announced investment in a new semiconductor manufacturing unit without giving any details.

Vedanta aims to double its production of silver, which is not only a precious metal, but has uses in the high-tech industry and renewable energy. In steel, which is a significant component of its business, it intends to double its capacity, said Agarwal, founder and chairman of Vedanta Resources. Vedanta did not give the timeline of its $20 billion investment.

However, private capex across sectors will have to wait for some more time.

Said Aditi Nayar, chief economist at Icra, “Capacity utilisation in the fourth quarter of FY21 marginally trailed the year-ago level, the subsequent second wave of Covid-19 has caused domestic demand to stumble and business sentiment also worsened in the first quarter of the current financial year. Such conditions do not augur well for an immediate surge in capex.”

In certain sectors, capacities are already being added such as those targeted by the PLI (production linked incentive) schemes, she said. “We expect broader risk appetite to improve with a lag, when there is adequate evidence of domestic and export demand sustaining. Broad-based capacity expansion is likely to set in during Q4FY22 or later,” Nayar said.

Rahul Bajoria, chief India economist at Barclays, said in the last several years, the government capex has been consistently filling in for lack of the private sector capex.

“This has largely been a function of low capacity utilisation and deleveraging, which is now coming to an end. We expect investment growth to show a more robust recovery in FY22-23,” he said.

Bankers said the country is at the cusp of a multi-year capex cycle, similar to that seen in FY03-12, thanks to the government plans to award $356 billion worth of orders in the next two years. Indian companies, after deleveraging their books in the last two years and reducing their finance costs substantially, are finally looking to expand.  

“The investment cycle is expected to get traction from the second half of the current financial year. Many projects are in the pipeline but waiting for clarity in the business and economic environment in the country and globally as these involve substantial exports,” said Samuel Joseph, deputy managing director of IDBI Bank.

Analysts at BoFA Global research said the Indian government's move to open up monopoly sectors will also drive private capex from FY24. “The Government is opening up large monopolies within gas/power distribution, railways, mining, and would mainly drive private capex. Most PSUs are cash rich but are re-orienting their business models towards new growth areas,” it said in a recent report.

The $25 billion surplus allocation for capex schemes by the government and $27 billion allocation towards PLI schemes will help Indian companies set up new factories and expand capacities.

Citing the recent steps taken by the government including a Bill to end retrospective taxation, prime minister Narendra Modi had on Wednesday said his government is ready to take big risks in the national interest, now industry should also enhance its natural risk taking tendency.

He had said the government is opening the strategic as well as non-strategic sectors for the private sector,  citing the decisions on commercial mining and opening up of the space and atomic sectors for India Inc.

Yuvika Singhal, economist at QuantEco Research, said capital expenditure by the government has seen a strong start in the current financial year, in line with the union Budget spiel. “Clocking a growth of 26.3 per cent during the first quarter of FY22 year-on-year, capex spending stood at 20.1 per cent of full year’s budgeted target led by spending by ministries of roads and railways.”

However, the private sector capex may continue to wait in the wings, perhaps for a bit longer. Stronger visibility of demand and improvement in capacity utilization from current levels are two important requisites in the current economic environment, she said. “When these are ripe, which to a large extent will be a function of progress on vaccinations, recovery in the private investment may be sifter aided by the strengthened balance sheets of listed companies that we have seen over the last year and a half,” Singhal said.  

India Ratings chief economist Devendra Pant said while the corporation tax rate cut was aimed at increasing capex in the economy, weak demand and low capacity utilisation pushed capex growth down. "Having said that some sectors are seeing relatively better demand conditions and sectors related to hospitality is expected to have weaker demand and thus muted capaex for some more time," he said.

On a low base of de-growth a year back, gross fixed capital formation rose 10.85 per cent in the fourth quarter of 2020-21. With the gross domestic product crawling back to growth, GFCF returned to over 30 per cent of GDP after one and a half years, despite muted private sector investments.