New investment demand likely to taper in second half of FY24: ICRA

New investment demand in the second half of this fiscal year is likely to be tempered amid increased geopolitical tensions in the Middle East, and a potential slowdown in the momentum of government capital expenditure (capex) and project execution prior to the general elections, said credit rating agency ICRA in its latest report on Tuesday.

The expected slowdown in new investment demand comes on the back of India’s investment activity remaining robust in Q2 FY24 as reflected in the year-on-year (y-o-y) performance of seven of the 11 investment-related indicators, barring indicators such as exports and imports of engineering goods, output of capital goods, and consumption of finished steel.

In the first half of this fiscal, the central government’s capital expenditure rose by 43.1 per cent, whereas capital outlay and net lending of 22 states rose sharply by 47.5 per cent, with the latter reaping the benefits of upfronting of tax devolution (Rs 4.6 trillion) and release of interest-free capex loan (Rs 535.4 billion vs nil in H1 FY2023) by the central government.

“However, the momentum of the central government’s capex and execution of projects may slow down towards the end of the fiscal year, ahead of the 2024 general elections. Elections in some states in Q3 FY2024 could result in a similar break in momentum. Besides, the growth in the central government’s capex target is likely to be relatively moderate in FY25 compared to the budgeted level for FY24 (37 per cent), amid continued focus on fiscal consolidation,” the report notes.

The report also notes that as many as 628 projects with an anticipated completion cost of Rs 7.7 trillion are scheduled to be completed in H2 FY24. Of these projects, 60-100 per cent of the anticipated cost of completion has already been spent on projects worth Rs 4.3 trillion by September.

“This number is very large and only a fraction of this is likely to be completed, given that project execution could potentially slow down towards the end of the fiscal year in the run-up to the elections, leading to spillovers to FY25,” the report notes.

Besides, the report also notes that the value of new project announcements dipped to a 13-quarter low of Rs 1.3 trillion in Q2 from Rs 6.1 trillion in Q1 (which was led by Indigo’s aircraft order of Rs 4.1 trillion). Moreover, announcements by both the government and private sectors were muted in Q2.

“Notably, barring the Covid-affected quarters, this was the lowest value of new project announcement since Q1 FY2005 (Rs 0.4 trillion). Going ahead, new investment announcements across sectors may be restrained in H2 FY24 amid the uncertainty on account of geopolitical tensions in the Middle East as well as in the run-up to the 2024 parliamentary elections,” the report notes.