India's private capex conundrum
Dear Readers,
This week a news report caught my attention: Tata Group unveiled plans to set up a Rs 27,000 crore semiconductor unit in Assam, promising thousands of jobs. Also, the large PSUs cumulatively spent Rs 2.16 lakh crore, or about 28% of the full year's aim of Rs 7.77 lakh crore, in the first four months of this fiscal, according to a report this week. These are encouraging developments that came after new investment plans in the country fell to a 20-year low in the April to June quarter, with just Rs 44,300 crore of fresh outlays announced by corporates. This was against new investment announcements of nearly Rs 7.9 lakh crore in the first quarter of 2023-24.
While leading run conglomerates and PSU companies have committed to significant investments, the anticipated broad-based upswing in private capex has yet to materialise.
Bankers rue that corporate sector loans have not picked up the way they had hoped for.
A seasoned banker recently told me that while the macroeconomic indicators and the broader narrative of India's growth remain promising, private capital expenditure has yet to gain momentum. At present, the economy's buoyancy is largely underpinned by government spending, with private-sector investments lagging behind.
Banks in crosshairs
It's not just the corporate sector that is displaying caution; venture capital funding has also seen a decline, reflecting a broader hesitancy to deploy capital amid these uncertainties.
An official of a leading private sector bank recently said that the lack of momentum in private capex explained the low deposit growth of banks.
“The private capex can be seen in two parts. We are already seeing brownfield capex. But what is happening is such kinds of capex are being financed currently by most of the corporates through internal approvals and their existing cash on their balance sheets,” the official said.
Brownfield capex generally means that companies expand their existing units for higher production, while greenfield capex is building new capacity from scratch.
“Unless greenfield capex happens, it doesn't hit the banks for bank borrowings. So while we are seeing initial green shoots in terms of private capex, there is not enough momentum and secure kind of strong private capex yet. But we are hoping that as corporates exhaust cash on their balance sheets and exhaust their internal goals to fund the capex and the capex get larger, they will come to the banking system to borrow,” the official had said.
The reasons
So, what are the reasons for corporate apathy towards investments despite encouragement and incentives from the government?
Several factors contribute to this cautious stance among corporates. The uncertain geopolitical landscape is a significant concern, as companies are wary of committing to large-scale investments without a clear understanding of how global dynamics will evolve. The looming state elections, even after Prime Minister Modi's return to power at the central level, add another layer of uncertainty.
Additionally, structural challenges such as land and labour reforms continue to impede growth. The scarcity of skilled labour is becoming increasingly evident, with high demand and limited supply driving up expectations. For instance, L&T is reportedly facing difficulties in recruiting over 40,000 skilled workers, underscoring the scale of the challenge.
The Insolvency and Bankruptcy Code (IBC) has also made companies more cautious. High-profile bankruptcies, such as those of Jet Airways, Essar, and Videocon, have served as stark reminders of the risks involved, with assets being seized by bankers. This has instilled a greater sense of prudence among corporates, who now recognise the imperative to ensure to keep their house in order first before expanding.
Moreover, the highly competitive nature of India's leading corporations adds another dimension to the cautious approach. The uncertainty surrounding the "China Plus" model, which aims to reduce dependency on China, further complicates the investment landscape, as its future trajectory remains unclear.
An examination of capacity utilisation also offers some insights into this hesitancy. While industries such as steel, cement, automobiles, and chemicals report higher utilisation rates of 75-80% due to improved demand, the overall picture is less encouraging. Capacity utilisation rates, which had recovered from the pandemic-induced low of 47.3% in Q1 FY21 to a peak of 76.3% in Q4 FY23, declined to 74.7% in Q3 FY24, according to the Reserve Bank of India (RBI). Without a substantial increase in demand for manufactured goods, average utilisation rates are unlikely to rise to levels that would necessitate additional capacity from the private sector.
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One factor often cited for the sluggishness in private investment is low private consumption expenditure. The theory posits that businesses hesitate to invest in expanding capacity when consumer demand remains weak. However, historical data suggests an inverse relationship between consumption and investment in India, complicating the narrative. The periods of highest private investment have coincided with declining consumption, hinting that the issue may lie not with consumer demand but with the broader economic environment.
Structural challenges, including unfavourable government policies and policy uncertainty, have likely exacerbated the decline in private capex. The initial wave of economic reforms in the 1990s and early 2000s unleashed a surge in private investment. However, the subsequent slowdown in the pace of reforms, coupled with inconsistent policy signals, has eroded investor confidence. Stability and predictability are critical for long-term investment decisions, and the perceived lack of these elements has likely deterred private investors from committing to new projects.
What can be done?
The increasing reliance on public investment to drive economic growth raises concerns about the potential crowding out of private investment. While government spending on infrastructure and other public goods is essential, it cannot substitute the efficiency and dynamism that private capital brings to the economy. Private investors are often more adept at allocating resources efficiently, and their reluctance to invest can lead to suboptimal economic outcomes.
The stagnation of private capex has far-reaching implications for India's economic future. Without a resurgence in private investment, the country risks slower economic growth and missed opportunities for job creation and technological advancement. The government's role in creating a conducive environment for private investment cannot be overstated. This includes not only ensuring policy stability but also addressing structural bottlenecks that have long hindered private sector growth.
As India stands on the cusp of what should be a period of rapid economic expansion, the current stagnation in private capex is a cause for concern. To unlock the potential of India's private sector, a concerted effort is needed to rebuild investor confidence, streamline regulatory frameworks, and ensure that the momentum of past decades is not lost. The road ahead is challenging, but with the right policies and a renewed focus on private investment, India can reclaim its position as a hub of dynamic economic activity.
The concentration of new investments among a limited number of major players is unlikely to sustain India's growth trajectory in the long term. A more widespread engagement from India Inc is essential, but the entrepreneurial spirit necessary for capacity expansion appears to be subdued.
As usual, I am adding here the top 5 stories of the week, trust you will find them meaningful.
Happy Reading
Amol Dethe,
Editor,
ETBFSI.