Indian Capex Outlook : The Way Ahead for Indian Growth Story

The capital expenditure (capex) narrative in recent times has been marked by significant growth and positive trends. Public capex, led predominantly by the central government, has exhibited strong performance. Till August of the current year, the Centre's capex has grown by a promising 48.1% year-on-year. State governments have also displayed a commitment to substantial capital spending, with 19 major states budgeting a combined capex of Rs 7.8 trillion, up 19.6% from last year. Notably, state capex has maintained robust momentum, witnessing approximately 45% growth in the April-August period compared to the previous year, bolstered by the Centre’s provision of conditional interest-free loans linked to actual capex spending.

On the private sector front, India Inc’s investment has shown a commendable recovery in FY23, with total capex surpassing pre-pandemic levels for the first time. However, there has been a slight moderation in new project announcements in the first half of FY24. Despite facing challenges such as potential fluctuations in domestic and external demand and higher financing costs, the private sector is well-positioned for a significant uptick in capex. This optimism is underpinned by improved capacity utilization and healthier balance sheets. As a result, there is a general expectation that private sector capex will accelerate in the upcoming quarters.

Investment is a crucial driver of economic activity, and this is reflected in the rise of Gross Fixed Capital Formation (GFCF) to 34% of the GDP in FY23, a level last observed in 2013. Capital Expenditure (capex), in particular, plays a vital role in enhancing the productive capacity of the economy and has a more significant impact on long-term growth and productivity compared to revenue expenditure. This greater impact of capex stems from its ability to create a substantial multiplier effect on overall economic growth.

Allocating capex to new projects, the expansion of existing businesses, or the improvement of technology and infrastructure leads to several positive economic outcomes. It boosts productivity, increases demand in related industries, and creates new job opportunities. These developments are essential for sustained economic growth.

The government's budget announcements are aimed at revitalizing what Keynes described as the 'animal spirits' in the economy. There is an expectation that increased public capex will serve as a stimulus, encouraging more investments from the private sector. This approach is designed to trigger a cycle of investment and growth, wherein public spending on capital projects lays the groundwork for increased private sector participation, leading to a more robust and dynamic economic environment.

An analysis of the state budgets from 19 major Indian states indicates that the total budgeted capital expenditure (capex) for FY24 is set to grow by 19.6% compared to FY23. This increase is primarily driven by significant rises in states like Gujarat (95%), Chhattisgarh (81%), Karnataka (34%), Odisha (29%), and Jharkhand (28%). However, it's important to note that states often face challenges in fully utilizing their allocated budgeted capex.

As of August's end, the collective utilization of the budgeted capex by these 19 states reached 25%, an improvement from the 20% seen in the same period of FY23. Notable performances were seen in Andhra Pradesh (51%), Telangana (49%), and Madhya Pradesh (42%), which demonstrated high capex utilization rates. On the other hand, states like Maharashtra (15%), Karnataka (12%), and Punjab (12%) exhibited lower rates of utilization. This slow pace in capex deployment, particularly in states with higher per capita incomes, remains a point of concern.

Despite these disparities, overall state capex has remained strong, witnessing a year-over-year growth of 45% in the April-August period of FY24. This growth surpasses both the budgeted increase of 19.6% and the 9.9% growth observed in the corresponding period of the previous fiscal year.

In summary, public capex in India has maintained robustness, largely due to the central government's proactive measures. While state capex has shown improvements compared to the previous fiscal year, there is significant variation in performance across different states, particularly in terms of budget utilization. To sustain and enhance India's economic growth, a continued and collaborative effort in expanding capex by both the central and state governments is crucial.

In recent years, public capital expenditure (capex) has remained robust, largely driven by central government initiatives. The government's unwavering dedication to capex is evident in its budget allocations. There has been a significant rise in the portion of capex within the total expenditure, increasing from 12.1% in FY21 to 22.2% in the budget estimate for FY24. The capex by the center saw a 48.1% year-on-year growth in the April-August FY24 period, utilizing 37.3% of the budgeted amount of Rs 10 trillion, which is an uptick from the 34.6% of the budgeted value spent in the same timeframe in FY23.

Investment is crucial for economic propulsion. The Gross Fixed Capital Formation climbed to 34% of the GDP in FY23, reaching levels last observed in 2013. Capex significantly boosts the economy's productive capabilities and has a more substantial impact on long-term growth and productivity compared to revenue expenditure. This significant influence is due to capex's ability to produce a more notable multiplier effect on overall growth prospects. Allocating capex for new projects, expanding existing operations, or improving technology and infrastructure stimulates economic growth by enhancing productivity, increasing demand in related industries, and creating employment opportunities. The government's budgetary announcements demonstrate a focused strategy to revive the 'Keynesian animal spirit', with the anticipation that increased public capex will stimulate further investments from the private sector.

Looking at the current year, public capital expenditure (capex) has shown commendable performance. Up to August, the Centre's capex has recorded a notable year-on-year growth of 48.1%. State governments, too, have planned for robust capital expenditure, with the combined budgeted capex for 19 major states reaching Rs 7.8 trillion, which is 19.6% higher than the previous year's budgeted figures. Unlike the previous year, state capex has sustained its growth, with the April-August period seeing an approximate 45% increase compared to the same period last year. The Centre’s initiative of providing conditional interest-free loans, contingent on actual capex spending, has significantly contributed to the rejuvenation of the capex cycle in states.

In terms of the private sector, there is a positive trend in India Inc’s investment. FY23 saw a recovery in total capex, exceeding pre-pandemic levels for the first time. However, the first half of FY24 witnessed a moderation in capex project announcements. Despite potential risks posed by domestic and external demand fluctuations and the increased cost of capital, which could lead firms to delay their capex plans, the prevailing conditions still favor a significant rise in private capex. This is supported by improvements in capacity utilization and deleveraged balance sheets. Consequently, there is optimism that private capex will gain further traction in the forthcoming quarters.

Looking at the current year, public capital expenditure (capex) has shown commendable performance. Up to August, the Centre's capex has recorded a notable year-on-year growth of 48.1%. State governments, too, have planned for robust capital expenditure, with the combined budgeted capex for 19 major states reaching Rs 7.8 trillion, which is 19.6% higher than the previous year's budgeted figures. Unlike the previous year, state capex has sustained its growth, with the April-August period seeing an approximate 45% increase compared to the same period last year. The Centre’s initiative of providing conditional interest-free loans, contingent on actual capex spending, has significantly contributed to the rejuvenation of the capex cycle in states.

In terms of the private sector, there is a positive trend in India Inc’s investment. FY23 saw a recovery in total capex, exceeding pre-pandemic levels for the first time. However, the first half of FY24 witnessed a moderation in capex project announcements. Despite potential risks posed by domestic and external demand fluctuations and the increased cost of capital, which could lead firms to delay their capex plans, the prevailing conditions still favor a significant rise in private capex. This is supported by improvements in capacity utilization and deleveraged balance sheets. Consequently, there is optimism that private capex will gain further traction in the forthcoming quarters.

A comprehensive analysis of the annual financial statements of 1,299 non-financial companies in India indicates a significant uptrend in capital expenditure (capex) within the corporate sector. In FY23, these companies collectively registered a robust year-over-year (YoY) growth in capex of 36.5%, a substantial increase compared to the 22.6% YoY growth seen in FY22. Notably, in 2023, the total capex of Indian non-financial firms exceeded pre-pandemic levels, marking a 3.3% increase above the 2019 baseline, indicating a strong recovery and expansion.

The primary sectors driving this capex growth in FY23 were crude oil (12%), power (10%), telecom (10%), iron & steel (9%), and retailing (9%). Of these, Iron & Steel and Retailing sectors experienced the most significant expansions, with an impressive growth of 187.6% YoY and 106.3% YoY respectively. On the other hand, the crude oil sector saw a decrease in investments, contracting by 15.8% YoY during the same period.

Key players contributing to capex in these sectors include major corporations like Reliance Industries, Oil and Natural Gas Corporation Ltd (ONGC), Bharti Airtel, NTPC, Tata Motors, Vodafone Idea Ltd, Indian Oil Corporation Ltd (IOCL), and Vedanta Ltd.

Moreover, major Central Public Sector Enterprises (CPSEs) with a capex target of over Rs 1 billion successfully met their capex goals in FY23. The total capex achieved was Rs 6.48 trillion, slightly surpassing the budgeted capex of Rs 6.46 trillion. In the current fiscal year, from April to August, these CPSEs have already realized a capex of Rs 3.1 trillion, which represents 42.3% of the budgetary estimate of Rs 7.3 trillion for the year, marking a significant YoY growth of 36.6%.

In conclusion, the capex trends in India's corporate sector and among CPSEs suggest a robust and continued commitment to investment, surpassing pre-pandemic levels and indicating a positive outlook for economic growth and development in the country.

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