Govt spending to push private capex higher after multi-year deleveraging

Orders, mostly from the govt, worth $356 bn expected in the next two years

After witnessing a subdued credit growth in their corporate loan books till June quarter, Indian banks are expecting a revival in the next few quarters with the Indian government giving fresh orders to Indian companies. Bankers said India is at the cusp of a multi-year capex cycle, similar to that seen in FY03-12 with the Indian Government awarding $356 billion worth of orders in the next 2 years. 

Banks said Indian companies -- after deleveraging their books in the last two years and reducing their finance costs substantially – are looking to expand.  “The investment cycle is expected to get a 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 expect private sector and PSUs to accelerate capex cycle growth as they expect $356 billion of orders to be awarded in the next two years – mainly by the government. Besides, the Indian government opening up monopoly sectors will also drive private capex from FY24. “The Government is opening up large monopolies within gas/power distribution, railways, mining, would mainly drive private capex. Most PSUs are cash rich but are re-orienting their business models towards new growth areas. Hence, drop in PSUs share of orders (13% over FY22-23) seems transitory,” it said in a report.

Soon after the June quarter results, Axis Bank executives had said working capital utilisation during the June quarter continued to be lower than pre-Covid levels. But as the economy begins to open up, the capex numbers would increase, they said.  “We are seeing the bottom around corporate deleveraging. The number of conversations the bank is having around capital expenditure are is significantly higher than what was seen over last one year. Some of these conversations will convert into disbursals over the next 6-12 months,” the officials said.

Analysts are expecting the Indian government to accelerate its spending in infrastructure development which will give a strong push to private capex as well. The $25 billion surplus allocation for capex schemes and $27 billion allocation towards PLI  (productivity linked inventives) schemes will help Indian companies to set up new factories and expand capacities.

As per BoFA Global Research, the $356 billion new orders by the Indian government has high visibility and could be supported by continuing trend of cut in its subsidies to push capex. The Indian government recycling capital by selling assets will also revive the capex, it said.

Analysts are also expecting that the $1 trillion infrastructure stimulus by the US government could drive product exports, and projects from Indian companies. “This (US spending) could open up opportunities for capital goods players such as ABB India, Siemens Ltd. & Cummins India for product exports, especially given their relatively low utilizations at 50-85 per cent, ambition to expand exports (15-25% of sales currently) and support from their US/Europe parents. It could also offer growth for EPC firms such as L&T which has already expanded its US reach,” analysts said.