Private capex cycle in slow lane: DBS

Combination of public spending and FDI inflows expected to spur private sector activity next year

Private sector activity in India is in a 'slow lane' but a combination of higher public spending and foreign direct investment (FDI) inflows are expected to boost momentum in this space in coming months, says a DBS report.

According to the global financial services major, India's growth this year is likely to be primarily driven by private consumption and to a lesser extent public spending, while private sector activity is yet to recover.

"Higher public investments (helped by off-budget funding) and FDI inflows are expected to crowd-in private sector interests next year," DBS said in a research note.

According to economic think tank CMIE, stalled projects as a percentage of projects under implementation remained high at 12.3 per cent in the April-June quarter, bulk of which accrued to private sector projects.

Moreover, new investment announcements slipped in the quarter, with private sector commitments plunging 60 per cent on a quarter-on-quarter basis.

The report noted that a combination of factors have delayed recovery in the sector.

Poor demand conditions, high cost of borrowing, delayed clearances and cost escalation were named as the main constraints. Besides, exports remain under pressure, limiting visibility of orders, thereby lowering the need to deploy or build capacities.

"While a turnaround this year might prove elusive, we expect a combination of higher off-balance sheet public spending and FDI inflows to spur private sector activity next year. FDI inflows (balance of payments basis) jumped nearly 60 per cent year-on-year in 2015," DBS said.

Concurrent improvements in urban and rural demand (spurred by a good monsoon) will also emerge as domestic catalysts to revive capex activity next year, it added.