Excess capacity, high interest rates, and impending elections, are key reasons why new investment plans continue to be on the drawing board of management, but not fructifying. Besides this, persisting question marks over consumption levels in the economy, particularly in the rural segment, have also held them back.
“Investments in the private sector are a function of the demand expectations. The significant commodity price inflation in FY23 and the interest rate hikes witnessed over the last one-and-a-half years impacted private consumption, thus resulting in deferral of some investments by the private sector,” said Kinjal Shah, Vice President and Co-Group Head of Corporate Ratings at ICRA.
For years in a row, the Centre has done the heavy lifting on capital investments, and took a series of measures including a sharp corporate tax rate cut and then a production-linked incentive scheme to spur private investment.
Crowding in of private investment has been the government’s constant refrain through the varying phases that included a once-in-century pandemic and protracted periods of slowing global growth. In 2022, Finance Minister Nirmala Sitharaman had even compared India Inc. to Hanuman, asking the industry why it was hesitant to invest and if, like Hanuman, it did not believe in its own strength.
But the government’s hopes have been belied.
A recent study by Bank of Baroda (BoB) said data on new investment announcements indicate the industry is still in a wait-and-watch mode. Only specific sectors such as aviation, power, chemicals and machinery, have witnessed an increase in new investment announcements.
A similar picture emerges from the financial sector, where bond issuances are dominated by the finance companies and there appears to be limited traction in bank credit to large manufacturing “There is still a long way to go for revival of investment. One factor holding back investment could be excess capacity in several sectors. RBI (Reserve Bank of India) data for June (quarter) shows the average at 73.6 per cent,” said the BoB study published in January.
At the aggregate level, capacity utilisation in the manufacturing sector recorded a seasonal decline to 73.6 per cent in Q1 FY24 from 76.3 per cent in the previous quarter, the latest RBI survey showed. The central bank releases this data with a lag. Capacity utilisation refers to the manufacturing and production capabilities being utilised by a company at any given point.
The quarterly data (from CMIE), however, shows some pick up in October-December (Q3) of FY24 at Rs 2.15 lakh crore as against Rs 1.87 lakh crore in April-June (Q2). Of the total new investment announcements worth Rs 10.8 lakh crore in April-December 2023, nearly 49 per cent were in the services sector, while the manufacturing sector had a relatively modest share of 28 per cent. Even within the services sector, transport services —mainly the civil aviation segment — had a share of 94 per cent, given the massive aircraft orders by Indian airlines over the past year.
According to ICRA’s Shah, some sectors like iron and steel, power, and construction are already in their investment phase. Others like auto are also likely to see an increase in investments towards new product development and investments in technology supported by the production linked incentive schemes. She added that improvement in demand, in addition to sops that help lower the overall cost of projects — like PLIs or subsidies — can push further private investments.
In the last four years, the government’s capital expenditure outlay trebled and is now projected to grow by a modest 11.1 per cent year-on-year to Rs 11.11 lakh crore in 2024-25 (FY25), indicating that the Centre’s impetus for growth through public investment is starting to taper off. Implicit in this expectation is the assumption that private investments have started to pick up, and would sustain on a durable basis.
Going by the Interim Budget for FY25, the government appears to believe that Hanuman (read Indian corporates) is now aware of his strength. This is one reason why the government may be withdrawing its foot away from the expenditure pedal.
“After two years of high double-digit capex allocation for the infrastructure sector, the pause button seems to have been pressed. Nevertheless, roads and railways continue to garner a lion’s share of the proposed expenditure this year,” said Jagannarayan Padmanabhan, Senior Director & Global Head, Transport, Mobility and Logistics, Consulting, CRISIL Market Intelligence and Analytics.
“The government has also indirectly signalled the need for greater private sector participation to support growth in these core sectors, which could mean asset monetisation could gather pace in the coming months,” he said.
A senior executive representing an influential industry group told The Indian Express that despite global uncertainties, there are “early signs” of crowding in of private investment. “This is borne out by the healthy public capex trajectory seen so far in the current fiscal… We expect to see the incipient signs of improvement in private investment getting further entrenched in the next year, partaking equally if not more than the public capex to support the growth recovery,” he said.
But the industry has said this earlier too.
Lower government market borrowings in FY25 may be seen as yet another incentive for the industry. “This means government borrowings will not crowd out borrowings for private investments both from availability and price perspective. This should help spur overall private investments,” said KVS Manian, Whole time Director, Kotak Mahindra Bank.
The gross and net market borrowings through dated securities during FY25 are estimated at Rs 14.13 lakh crore and 11.75 lakh crore, respectively. In her Interim Budget speech on Thursday, Sitharaman said “private investments are happening at scale” and the lower borrowings shall facilitate larger availability of credit for the private sector.
For years in a row, the Centre has done the heavy lifting on capital investments, and took a series of measures including a sharp corporate tax rate cut and then a production-linked incentive scheme to spur private investment. (Express photo by Tashi Tobgyal) 
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