Indian private sector to take a cue from government and raise investments in fixed assets

• India’s investments into fixed assets has hit a decadal high in the fourth quarter of FY23.
  
• In the last quarter of FY23, government capex was up ove 20% compared to the same period a year before. Private entities too will follow suit, says Nirmal Bang.
  
• Improving affordability and rising loan tenures could possibly sustain a multi-year residential real estate cycle.
  

India’s investments into fixed assets hit a decadal high in the fourth quarter of FY23. Measured in terms of Gross Fixed Capital Formation (GFCF) — which is investments of producers in fixed assets — it’s now at a high of 35.3% of India’s gross domestic product (GDP), as per a research report by Nirmal Bang.

The trigger to this high is the Indian government raising its spending. In the last quarter of FY23, its capex was up by 22.9% YoY. Going ahead, the research firm believes that private entities too will go in for capacity expansion —- as capacity utilization of industries is now hovering between 74-75% in the last one year on an average.

“Private capex announcements in FY23 more than doubled from pre-pandemic levels and are running ahead of the central and state governments,” said a Nirmal Bang report named India Capex Meter.

Overall, new capex crossed the pre-pandemic peak and stood at around ₹12 lakh crore tn in 4QFY23, according to data from CMIE.

Multi-year residential real estate cycle

Real mortgage rates have risen over the past year, but a structural downtrend persists. The report finds that the Indian household capex has held on, aiding growth in the housing sector.

While it did flatten out recently due to rising interest rates, growth in housing credit could possibly sustain marginally above system credit growth, Nirmal Bang believes.

“This, along with improving affordability and rising loan tenures could possibly sustain a multi- year residential real estate cycle,” it adds.

For corporates, however, real interest rates have recently turned slightly adverse, rising above their long-term trend. This however is unlikely to be a major deterrent in the near term since the initial leg of private capex recovery is unlikely to be bank funded.

Capital goods sector

Most of the capex indicators have remained in positive territory over the past year, the most significant being the capital goods sector – that builds industries.

“While the central government’s persistent capex focus provided the initial thrust, indicators such as capital goods production and capital goods imports too have sustained in the positive territory over the past year,” the report said.

Yet another indicator, that’s – the profitability of the capital goods sector has also improved. “Operating profitability of BSE Capital Goods companies has sustained in the positive territory despite persistent pressure on margins. Over the past two quarters, operating profitability of the BSE Capital Goods companies has grown by over 15% YoY,” said Nirmal Bang.

There’s more steam left?

State and central governments have been steadily spending on building road projects. The road construction has been robust, but the nature of investment into the sector seems to be changing.

While state and central governments seem to be slowing down, the private sector is more than making up for it, with project announcements. Bank credit to the sector is also on-point.

“Bank credit to the infrastructure sector has seen some sluggishness recently, but bank credit to the roads sector, which is the key beneficiary of government capex, seems to be holding up,” the report said.

Manufacturing back to pre-Covid levels

Going by the investment proposals, there seems to be a broad-based capex recovery, the research report says.

In 4QFY23, investments in the manufacturing sector were about 48% above the pre-Covid level. “Sectors that saw recovery were chemicals, metals, machinery and miscellaneous manufacturing. Investments in food & agro-based products remained below the pre-pandemic level,” said Nirmal Bang.

The top sector in terms of investment proposals by value is metals. It is followed by sectors such as sugar, transportation, textiles, drugs & pharmaceuticals, chemicals and fermentation-based pharmaceuticals.

Even sectors such as leather are seeing some resurgence, aided by China +1 strategies. The share of sectors like electrical equipment is seen moderating as some of the early Production Linked Incentive (PLI) schemes get implemented. On the other hand, proposals from sectors like food processing and textiles are seen rising.