A measure of the economy: companies, capex and a hint of concern

When demand is uncertain; the biggest private enterprises seem better able to build factories, expand resources and create jobs.

The first advance estimates of national income released earlier this month shows that overall capital expenditure (capex) may finally be at levels seen two years ago. But there are worries that private sector capex hasn't picked up as much as it was hoped.

Private sector capex is important for it is associated with economic growth and employment. Companies invest in expanding production capacity--by building new factories for example--when they reckon that existing resources will not be enough for demand. Asset addition has noticeably slowed down in the coronavirus pandemic by that measure, shows an analysis Business Standard did of the 500 most valuable companies by market capitalisation. We examined companies with comparable data across the years and excluded the banking and financial sector.

The gross block for the top 5 per cent companies grew faster than the bottom 5 per cent. Gross block comprises all the assets a company owns. The top 5 per cent companies saw a median rise in gross block of 6.41 per cent for the financial year 2020-21 (FY21), or roughly a year after the pandemic. The corresponding rise was 1.54 per cent for the bottom 5 per cent companies. This shows that the trend of larger companies investing more on capacity addition has continued even as capex across the board has hit multi-year lows as seen in chart 1 (click image for interactive link).



We also looked at capital work in progress: money spent on investments still to be completed. For example, this can cover ongoing investments for constructing a factory. The value of capital work in progress, while highly variable depending on the year, shows a clear trend over the last two years. It fell irrespective of size in FY20 as the economy slowed down and Covid-19 cases started rising. The bottom five per cent of companies was hit worst. The next year the economy started recovering but that didn’t lift the sails of small companies (see chart 2).



Smaller companies' business has been the slowest to recover. Sales growth slowed for the largest companies but stayed positive. It turned negative for the smallest players in FY20. The contraction worsened in FY21 (see chart 3).

“The phasing profile of envisaged capex shows persisting near-term risks to the private investment outlook in 2021-22,” said the Reserve Bank of India’s September bulletin. It noted that new project announcements were rare and companies were taking longer to complete existing ones even before Covid-19, reflecting a sluggish investment environment as capacity utilisation slowed.

The advance estimates suggest that private final consumption expenditure has fallen since that time, and is still below FY20 levels. This means that households aren’t spending on goods and services like before. The analysis above would suggest that smaller companies are affected most by lack of demand. Poor demand may well mean that companies, especially smaller ones, have less of an incentive to build new factories or expand their production capacity.

Private capex may still be far from an immediate priority, especially for companies at the bottom of the corporate pyramid.