Private capex may start picking up by end of next fiscal, says India Inc

Govt's increased capex will benefit Indian companies, but with a lag

While the Indian government will be spending Rs 7.5 trillion--its highest ever--as capital expenditure in building new infrastructure, fresh investments by Indian companies are still few quarters away as the government orders will come with a lag, say CEOs.

Delay in giving new orders by the government, litigation and mobilising workers in the pandemic-hit economy are some of the reasons cited by company officials in lack of capex by the private companies.

At present, barring few top companies like Reliance Industries, Adani, Tata and JSW groups, very few companies are investing in capital expenditure. While Reliance has announced investments of $10 billion in renewable energy foray in the next three years, the Adani group will invest $70 billion in renewable energy and eco-system by 2030.

The Tata group is investing in acquiring new companies like Air India and Neelachal Ispat instead of investing in fresh capacity. The Aditya Birla group has talked about a Capex mahotsav for the next decade and is investing in a new paints business.

CEOs said challenges ranging from new variants of the Covid-19 virus, high commodity prices, material shortages especially pertaining to semiconductors will likely weigh on recovery.

Shankar Raman, chief financial officer at Larsen & Toubro, said while increased government expenditure is certainly a positive move, it will trigger investment by the private sector with a lag. "I don't see it happening before 24 to 36 months. This will start picking up by the last quarter of FY23  and then see steady progress in FY24," said Raman. He expects India's economic growth to moderate from the 9.2 per cent expected for FY22 as the impact of the low base wears off.  Directionally, it will be lower by 100 basis points, Raman said.  

“Businesses may be finding ways to remain competitive in their pricing. This could also strain for some time the market quest for fresh investments in sunrise sectors. We expect industrial capex to pick up only by the second half of calendar 2022.,” said N Venu, MD & CEO, India & South Asia, Hitachi Energy India, an infrastructure provider. The company plans have an ongoing capex of Rs 200-250 crore in greenfield and expansion projects.

The thrust of the government’s policies is on infrastructure creation, and reviving the rural economy. The government is also expecting its fresh orders will have a multiplier effect and revive private capex. Corporate leaders say the multiplier effect of capex spending is not just limited to one year, as its impact is spread over the next few years with a cumulative impact of 3-4 times the spend.  “Therefore, private capex can pick up in the next fiscal, in those sectors where capacity utilisation is near or above the threshold of 74%, which triggers fresh investment. However, much will depend upon the pick-up in demand amidst the inflationary pressures and recovery of earnings at the lower income strata, Hash Pati Singhania, Director of JK Organisation and former President FICCI, a business lobby group.

Others agree. “The increased capex by the Indian government is significant and should ideally trigger private investment and lead to growth. However, for the investment to yield results, it will take some time. Added to this, the government's thrust on infrastructure, logistics and urban planning also augurs well for the long term,” said Kamal Nandi, Business Head and Executive Vice President – Godrej Appliances, part of Godrej & Boyce.

The telecom companies are expected to invest in 5G related equipment once the auction is over. Analysts say the pricing of spectrum will be a key factor for the success of the auction as telecom companies have indicated their unwillingness to participate if the government does not suitably price available spectrum.