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Credit Suisse believes that India’s investment cycle is doing better than most people believe.
“…Fundamentals suggest the pick-up will be both reasonably robust and sustainable. We are looking for real gross fixed capital formation to expand by around 8% in 2013/14 and 12% in 2014/15,” said a report entitled ‘India capex: The revival begins’ dated May 09, and authored by research analyst Robert Prior-Wandesforde.
Why is everybody else less optimistic? The brokerage suggested that five myths that may be clouding market perspective on Indian capex:
Myth 1 – There is no recovery in investment: The national accounts data actually showed capital spending rising 6% in the year to the December quarter, while growth in the production of capital goods bottomed in mid-2012.
Myth 2 – Investment won’t pick up before capacity utilisation rises: While this appears logical, the data suggests capex growth actually leads CapU. This is also true of other countries.
Myth 3 – Bank lending growth leads capital investment: This is another popular argument but, again, the causality runs the other way round probably because companies initially finance higher capex from retained earnings.
Myth 4 – Interest rates have little impact on investment spending: Our statistical analysis clearly suggests that interest rates have a significant role to play in driving capex…Statistically, the strongest effect from this interest rate variable is felt after two quarters.
Myth 5 – Upcoming elections will lead firms to postpone investment: History again suggests this is unlikely to be the case…it is not as though India is unused to political instability – it had three elections in three years in the late-1990s, for example.
