After the year of reset, businesses now poised to truly get back in form

Some firms braved the headwinds and stepped on the gas, others played it safe; green energy turned a bright spot

After two years of a pandemic-induced slowdown, India Inc was expected to expand with gusto. That is yet to happen. Though some companies have managed to buck the trend – with projects from Adani, Ambani and Vedanta stables dominating new investment proposals in the first two quarters of FY23 – most Indian businesses hunkered down against the headwinds of an impending global slowdown, supply chain disruptions, rising interest rates and input costs, and subdued demand.

This much was evident in corporate earnings for Q2FY23. After a post-Covid uptick, mainly on the back of sweeping cost-cutting and layoffs, margins and profits shrank in the July-September quarter of FY23, the first decline since April-June FY20, which covered the lockdown months. The consequences of global and domestic pressures have meant that investment levels have been sub-optimal, despite Finance Minister Nirmala Sitharaman’s exhortations to industry to invest and not expect subsidies in the form of productivity-linked schemes to loosen the purse-strings. Gross fixed capital formation, one indicator of investment sentiment, inched up in Q2FY23 to 29.6 per cent of GDP compared with 29.2 per cent in Q1.

Much of the reluctance by corporations in India to commit to higher capex despite stronger balance sheets is a product of the uneven demand picture. The passenger car industry, for instance, has defied the demand slump and the global chip shortage with a healthy acceleration that sustained past the festive season. In November, car sales crossed 310,000 units, the sixth consecutive month that sales have crossed 300,000. The big four of the industry – Maruti Suzuki, Tata Motors, Hyundai and Mahindra & Mahindra – have seen sales bumps of between 21 and 55 per cent in November over the same month last year. Significantly, too, and perhaps indicative of the K-shaped recovery in the economy, it is mid- and high-end cars that have driven sales, whereas entry-level cars have been all but stagnant, principally because demand comes from households that are yet to fully recover from the pandemic shocks This is true of the stalling two-wheeler market as well.

The trend is repeated in the fast moving consumer goods industry, which has seen volumes fall for five consecutive quarters principally because of the slow recovery of rural sales, one of the two cylinders on which the industry fires. Slowing demand in rural households is mostly the result of double-digit price rises, which have helped the bottom lines of FMCG majors even if the topline has been weak. A NielsenIQ study suggests that new offerings are mostly in the form of smaller pack sizes to accommodate both current buyer preferences and rising producer costs.

The cumulative impact of the uneven recovery in demand and the pressures brought on by the Russia-Ukraine conflict have also resulted in a sharp contraction in foreign direct investment from six of the top ten investing regions in the first half of FY23. Government data shows that foreign direct equity investments in the April-September period dropped 14 per cent to $26.9 billion.

But there are signs of a change in sentiment in the second half of the year. For instance, between 2020 and September this year, Swiss foods giant Nestlé has committed an investment of Rs 7,600 crore in India, which almost equals the Rs 8,000 crore it invested in the country in the past 60 years. Much of this, the company said, would be invested in capex expansions and brand building. Significantly, Nestlé, which has principally been an urban market brand, is looking to expand in rural India in a big way in the years ahead.

Steel companies, which have suffered from a 15 per cent export tax (since lifted) and a sharp 30-40 per cent correction in global steel prices, are one of the industries holding the fort. Despite this, JSW, AM/NS and Tata Steel have stayed the investment course with their big-ticket expansion plans of 130 million tonnes per year by FY2031, 30 per cent of which is expected to be commissioned in the next three or four years.

The big picture, in fact, suggests that private sector investment is likely to drive new projects going forward. According to preliminary numbers in CMIE’s Capex database, investment proposals worth Rs 3.1 trillion were made by the private sector in the quarter ended September, higher than the average quarterly new investment proposals by the private sector that hovers at Rs 2.1-2.5 trillion. The notable point that CMIE highlights is that capex proposals in this quarter are not weighted by Adani/Ambani/Vedanta but by a clutch of green energy businesses. There is, for example, Avaada Energy’s Rs 400 billion one million tonne green ammonia plant in Rajasthan or Indosol Solar’s Rs 431 billion plant in Andhra Pradesh.

Such diversification of investment proposals beyond the big business houses, CMIE observes, could mark a genuine resurgence of investment sentiment. The reset by Indian business may have been late in coming, but 2024 may mark the year that India Inc truly gets back to business.