India on the brink of witnessing a 2003-08 kind of capex push but challenges remain

• Market watchers have been hoping that India might head to a capex cycle as seen in 2003-08.
• While there are similarities, the global demand scenario is different, say economists.
• In terms of announcements, most of them relate to airlines where the benefits flow to the manufacturers outside India.
  

The Indian markets are hitting new highs every day and the government is hopeful that this will translate to a higher capital expenditure (capex) cycle starting soon. However, even as hopes build for a repeat of 2003-08, the early indicators are mixed, as per economists.

“There have been affirmative statements made by several companies on investment in FY24 which is positive as it is premised on a recovery in consumption demand. The picture for the first quarter of the year is, however, quite expectedly mixed. Therefore the announcements are definitely not broad-based and are restricted to a handful of sectors,” say economists at Bank of Baroda.

What’s common with 2003-08?

Most experts say that levers are in place for a repeat for the 2003-2208 high capex phase, which was led by private investment. Tailwinds for a capex recovery are similar — like higher utilisation levels which are also expected to pick up in demand. Strong bank and corporate balance sheets, an infrastructure push by the Indian government in the form of highways, railways, rural infra, Jal Jeevan Mission and defence spending should augur well for this.

Moreover, the Production Linked Incentive (PLI) is also another added positive for domestic manufacturing, in addition to the push for energy transition. The amplified need for data centres and China+1 strategy are providing a fertile ground for revival of the capex cycle, says India Strategy report by Prabhudas Liladher.

“This is likely to be the first industrial led capex cycle after the 2003-08 cycle was led by power and infra,” says the Prabhudas Lilladher report.

A Kotak Institutional Equities report agrees that the levers are in place but remains cautious, it believes that the space for a sustained pace of government capex is limited.

“Private capex cycle would require visibility of long-term high demand growth (including global growth), which is still missing. For now, even as the long-term growth fundamentals remain strong, we remain cautious in calling out for a broad-based sustained capex cycle,” Kotak says.

Without a global impetus and visibility of medium to long-term demand, the capex cycle over the next 5-7 years may be much narrower and slower than 2003-08, the report adds.

Airlines invest, but where?

As much as ₹5.96 lakh crore worth of investments have been announced for Q1FY24 – of which 74% share comes from the airlines sector.

“Investments in this industry are unique in so far as it involves purchase of aeroplanes which are imported. Hence while it does add to the capital stock of the country it would not be generating backward linkages with other sectors and hence other related industries may not benefit much from such purchases. The boost is more for the global manufacturers of these aircrafts,” says Bank of Baroda.

The share of power sector is 10%, and is from the conventional space. The chemicals sector has a share of 8% followed by machinery with 3% and the auto sector with 2%.

‘Optimism in the long-term’

Data from the funds raised in the corporate bond market also provides a clue into the mood of private investments. As per BoB data, the total amount of funds raised was impressive at ₹2.33 lakh crore as against ₹0.97 lakh crore in the last year.

Here too, 89% of the funds mobilised was from the financial sector of which asset financing companies accounted for 72% – indicating limited fund raising by non-finance companies.

“Therefore, the investment story looks blurred when looked at from the point of view of the debt market. There could be reasons to be optimistic of the future. However, in the short to medium term the heavy lifting has to be done by the government on investment,” say BoB economists.