Opinion Express View: The capex cycle looks poised for an uptick

This may not just boost consumption demand but also could be the last trigger needed for India to witness a broad-based recovery in capital expenditure, especially in the private sector. To be sure, over the past five years, the government’s broader strategy has been to incentivise a recovery of private sector investment sentiment as the main channel for economic growth.

To this end, the government has provided a whole host of policy incentives such as a historic cut in corporate tax rate and production-linked incentives while continuing to ramp up its own capital expenditure to historic levels. However, the hope for a private sector capex recovery hit back-to-back rough patches. First, the Covid pandemic destroyed consumer demand and then the spiralling inflation (in the wake of the war in Ukraine) robbed consumers of purchasing power.

The end result was a dampening of animal spirits in the private sector. But with inflation moderating and the RBI already showing signs of an extended pause on monetary tightening, it can be said that the domestic economy looks primed for take off.

There are several reasons why this may happen. For one, Indian banks are considerably healthier; their capital adequacy ratio is close to an all-time high.

Banks are the financiers of India’s growth story and their being laden with massive amounts of bad loans was one key reason for the slowdown in the three years before Covid. Further, the private sector itself has deleveraged substantially.

The debt-to-equity ratio for the corporate sector is at a 15-year low. Over-leveraged firms were the other big stumbling block holding back India’s growth in the past decade.

Taken together, these two factors will boost the risk appetite for new investments. And there are initial signs that this is happening. Credit growth is close to pre-pandemic highs and new project announcements by the private sector by the end of March were 150 per cent above the pre-pandemic levels.

Similarly, as a report from Jefferies equity research points out, the flow orders to industry companies have also witnessed more than 15 per cent growth (year on year) from the pre-pandemic lows of 5 per cent. Another key metric that signals a turnaround in the private capex cycle is the capacity utilisation level — at 73 per cent it is above the historical average and suggests that India is on the brink of a new phase of the capex cycle.