Capex cycle shows revival signs

Lagged effects of lower interest rates, slightly stronger exports and improved equity market performance may help

Capital expenditure (capex) is showing signs of revival. According to experts, this would resume in the current quarter, with the lagged effect of lower interest rates, slightly stronger exports and improved equity market performance.

“In modelling real investment growth, we find various interest rate variables, the oil price, export growth and the equity market (designed to pick up profit expectations) to be key macro drivers, all becoming more supportive. Meanwhile, the government’s Cabinet Committee on Investment might succeed in unlocking some stalled projects,” said Robert Prior-Wandesforde of Credit Suisse in a research report on Thursday.

For some banks, funding of  the capex cycle had begun in the fourth quarter of 2011-12. A senior State Bank of India official said there was a substantial increase in term loan drawals in that quarter, especially in March. Most term loans are for funding capex. Public sector units such as Steel Authority of India have availed of the facility. The country’s largest lender saw advances grow by 21 per cent year-on-year at the end of March. Asked if the trend would continue, the executive said there was some improvement in perception but it was too early to be sure.

During the fourth quarter of 2012-13, many Indian companies tapped the market abroad for financing capex. According to a Reserve Bank of India report on macroeconomic development during that quarter, external commercial borrowing was mainly to fund the power sector, modernisation, import of capital goods and new projects.   

According to a few economists, the growth might not be broad-based. However, even if ones goes by the most conservative baseline projection of Gross Domestic Product (GDP) growth, of 5.7 per cent by the Reserve Bank of  India (RBI) for the current financial year, some revival in the capex cycle could definitely be expected. “The level of optimism has definitely gone up, compared to what it was till the third quarter. Revival of the capex cycle is definitely on the cards,” said Rupa Rege Nitsure, chief economist, Bank of Baroda.

The slowing in capex in the past was due to reduction in the growth rate of new project additions and the rising pace of projects being shelved.

However, some experts feel it is too early to tell if there is a trend. “We have not seen new project announcements from the private sector. Whatever incremental new project announcements are coming are only from the public sector. Large public sector undertakings like Coal India have announced investments and capex for this fiscal. Most of the private sector are waiting for elections. There is definitely political uncertainty, due to which they are not willing to commit capital,” said Nidhesh Jain, analyst with Espirito Santo Securities.

SIGNS OF HOPE

* For a few banks, the funding of capex cycle had already begun in the fourth quarter of the previous financial year
* Economists say the level of optimism has gone up due to which recovery in capex cycle is on cards
* A few experts opine new projects are not being announced by the private sector