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The Indian economy is now the toast of the world, with one of the highest economic growth rates among major economies. The improvement in India’s headline GDP comes at a time when major global economies are experiencing an economic slowdown due to factors like monetary tightening by central banks, higher inflation, supply-chain disruptions and ongoing wars in East Europe and West Asia.
According to data from National Statistical Organisation (NSO), India’s gross domestic product (GDP) at constant 2011-12 prices expanded by 8.4 per cent year-on-year (Y-o-Y) in the October-December quarter (Q3) of 2023-24 (FY24), an improvement from 8.1 per cent growth reported in the July-September quarter (Q2) of FY24. In 2022-23, India’s GDP had grown by 7 per cent. This prompted an upward revision of India’s growth estimates for FY25 by analysts and rating agencies. Recently, Reserve Bank of India (RBI) Governor Shaktikanta Das also said that GDP growth for FY24 might come close to 8 per cent.
In India, acceleration in the headline GDP growth, coupled with benign conditions in the financial and capital markets, has raised hopes of an imminent revival in capital expenditure (capex) by the private sector, which has been a missing piece in the country’s growth story in recent years.
In fact, in recent years, companies’ capex growth has trailed growth in their revenues and profits. Consider this. In the last ten years, the combined assets of BS1000 companies have expanded at a compound annual growth rate (CAGR) of 6.7 per cent. In the same period, their combined revenues have clocked a CAGR of 7.6 per cent, and their combined net profit a CAGR of 9.8 per cent.
Broad-based economic growth
Economists now expect a turnaround in the private-sector capex cycle. “Given the strong macroeconomic fundamentals, consumption and investments are expected to maintain growth, if not drive it higher in FY25. In addition to the continued growth in government capex, a pickup in private capex is expected to be broad-based,” said Madan Sabnavis, chief economist at Bank of Baroda, in a recent note. He expects the Indian economy to clock a growth rate of 7.8 per cent in FY25.
“After a sluggish decade, manufacturing will pick up pace on improving competitiveness, increasing investments, global opportunities from supply-chain diversification, the green-transition imperative and domestic policy push,” said Amish Mehta, managing director & chief executive officer (MD & CEO) at CRISIL. Mehta expects a gradual moderation in government capex and the baton being taken up by the private sector. The rating agency, which is majority owned by US-based S&P Global Inc, expects India’s GDP growth to moderate to 6.8 per cent in FY25.
The case for private sector capex has also been boosted by a big increase in capital expenditure by the central government in recent years. In the past three years, the annual capex by the central government has increased at a CAGR of 30.6 per cent, rising from Rs 4.26 trillion in FY21 to Rs 9.5 trillion in FY24, with these being made largely in building highways and railways as well as defence equipment acquisitions.
Benign monetary policy
The RBI has been far more sympathetic to growth concerns than other major central banks. For example, the United States Federal Reserve (US Fed) has raised its policy rates or Fed Funds rate from 0.9 per cent in August 2021 to 5.33 per cent currently. As a result, the benchmark US 10-year treasury yield has shot up to about 4.16 per cent from a record low of 0.5 per cent in July 2020. By comparison, the benchmark bond yield in the US was 2.4 per cent on average in the post-Lehman crisis period (January 2009 to December 2019).
In contrast, the RBI has raised its policy rate or repo rate by only 250 basis points in the post-Covid period from 4 per cent in May 2022 to 6.5 per cent currently; between 22 May 2020 and May 2022, it remained at 4 per cent.
As a result, the yield on benchmark 10-year India government bonds has increased by just 130 basis points in the past three and half years from a low of 5.75 per cent in July 2020 to a little over 7 per cent currently. The average yield on 10-year Government of India bonds was 7.7 per cent in the post-Lehman period. In other words, the lending rates in India are currently lower than in the pre-Covid period, while in the US, corporate and retail borrowers are now paying higher interest rates than they paid prior to the pandemic.
This has translated into benign financial conditions in India and it shows in high double-digit growth in bank credit for a second straight year in FY24. The fundraising through the equity market also remains robust with a boom in the pricing and subscription of initial public offerings (IPOs). Corporate India can’t expect a better macroeconomic recipe to go on a capex binge and crank up their growth engine.
Yet, corporate India seems reluctant
The financials of the listed companies, including BS1000, however, indicate that companies are still reluctant to speed up capex. The combined assets of listed companies excluding banking, financial services and insurance (BFSI) were up 5.4 per cent Y-o-Y in the first half (April-September) of FY24, a decline from 8.1 per cent growth in the second half (October-March) of FY23 and 10.7 per cent Y-o-Y growth in H1FY23.
* Listed companies (Full list)
* Listed companies (Full list)
This also shows in the slower growth in bank credit to the industry. According to RBI data, bank credit to industry was up 6.8 per cent Y-o-Y on average during the April-December 2023 period, down from 10.7 per cent growth during the April-December 2022 period. In comparison, the overall non-food credit grew by 18.7 per cent Y-o-Y in the first nine months of FY24, an improvement from 14.3 per cent Y-o-Y growth during the same period in FY23. The bank credit was led by personal loans, which grew by 26.7 per cent Y-o-Y during the April-December 2023 period.
So, what’s holding India Inc back from embarking on an aggressive capex journey to take advantage of the various growth opportunities available in the economy right now?
Weak consumer demand
Analysts attribute this to a slowdown in overall consumer demand in the country. “The corporate results for the first nine months of FY24 suggest a sharp consumer demand slowdown, and there has even been a volume contraction in some segments,” said Dhananjay Sinha, co-head of Equities and head of Research of Strategy and Economics at Systematix Institutional Equity.
The combined revenues of BS1000 companies were up just 2.5 per cent Y-o-Y in the first nine months of FY24, a sharp slowdown from 22.7 per cent Y-o-Y growth in FY23. Their combined net profit was, however, up 34.2 per cent
Y-o-Y in 9MFY24, driven by a sharp rise in operating profit margins.
“On a broader canvas, the pulse of consumption has been weak; only some pockets have fared better on volume trajectory, such as paints, and jewellery,” wrote Gautam Duggad, Deven Mistry and Aanshul Agarawal of Motilal Oswal Financial Services.
The combined net sales of a broader sample of 2,750 listed companies ex-BFSI was up just 4.5 per cent Y-o-Y in Q3 of FY24, down from 15.9 per cent Y-o-Y growth in the year-ago period. The slowdown was sharpest for FMCG companies, which saw their combined net sales grow by just 2.5 per cent Y-o-Y in Q3FY24, the slowest growth rate in 14 quarters. The discretionary and big-ticket consumption, however, grew faster, aiding the growth of automakers. The combined net sales of listed automakers were up 16.5 per cent Y-o-Y in Q3 of FY24, though the growth rate moderated on a sequential basis.
Discretionary and big-ticket consumer goods, however, account for a very small part of overall consumer spending in the country. According to the National Sample Survey Organisation’s (NSSO’s) latest Household Consumption Expenditure Survey, durable goods accounted for 7.13 per cent of urban and 6.9 per cent of rural consumer spending, respectively, in FY23.
Another 5.4 per cent and 6.1 per cent of urban and rural consumer spending, respectively, was accounted for by clothing, footwear, and bedding. Nearly 87 per cent of overall household consumption expenditure is accounted for by necessities such as food & beverages, personal care products, health care, fuel & light expenses, conveyance and rents.
Another 5.4 per cent and 6.1 per cent of urban and rural consumer spending, respectively, was accounted for by clothing, footwear, and bedding. Nearly 87 per cent of overall household consumption expenditure is accounted for by necessities such as food & beverages, personal care products, health care, fuel & light expenses, conveyance and rents.
“Aggregate demand is largely driven by the government capex. Prevailing consumption demand is highly skewed in favour of goods and services consumed by the households belonging to the upper 50 per cent of the income bracket and therefore not broad-based. This is reflected in the manufacturing growth which is also not broad-based,” writes Sunil Kumar Sinha (senior director & principal economist) and Paras Jasrai (senior analyst) at India Ratings and Research.
At the macro level, the private final consumption expenditure (PFCE) at constant prices is expected to grow by only 3 per cent in FY24, more than halving from 6.8 per cent in the previous year, according to the latest estimates by the NSO. Similarly, growth in PFCE at current prices is expected to slow down to 8 per cent in FY24 from 14.2 per cent the previous year.
This is significant, as PFCE is the biggest segment of the economy, and it accounted for 58 per cent of India’s GDP at constant prices and 60.9 per cent at current prices in FY23.
“Weak demand is forcing many companies to scale back operations and it shows a decline in raw material expenses and inventories in the manufacturing sector, while in the service sector there’s a slowdown in salary & wage expenses and a freeze on fresh hiring,” said Sinha.
A slowdown in household consumption spending is attributed to factors such as poor income and wage growth, high inflation, and a rise in indirect taxes in recent quarters.
Indirect taxes on goods & services (net of subsidies) are expected to grow by 18.4 per cent in FY24 compared with 9.1 per cent GDP growth at current prices. As a result, indirect taxes will account for 9.2 per cent of GDP in FY24, up from 8.3 per cent in FY22 and 8.5 per cent in FY23. A rise in indirect taxes translates into higher prices of goods and services, and it affects low-income families more than the rich as they spend most of their income on essential consumption. Besides, indirect taxes are not progressive, unlike personal income taxes.
Slowdown in exports
Exports have not been helping the overall demand either. India’s goods exports were down 4.9 per cent Y-o-Y for the first 10 months (April to January period) of FY24. As a result, the share of goods exports in India’s GDP is expected to decline to 11.4 per cent in FY24 from 13.3 per cent in FY23 and 13.4 per cent in FY22. At its high in FY14, merchandise exports accounted for 16.9 per cent of India’s GDP.
In contrast, faster growth in goods exports was central to the swift recovery in the Indian economy from the Covid-19 economic and financial shock. Goods exports were up 44.6 per cent in FY22 and 6.9 per cent in FY23 and played a crucial role in the post-pandemic recovery of the economy.
Services exports have done better and grown 6.3 per cent Y-o-Y during the first 10 months of FY24. However, it’s a labour-intensive sector and does not translate into much capex. Secondly, the quarterly results of information technology (IT) services firms such as Tata Consultancy Services and Infosys, suggest a slowdown in services exports as well. The combined net sales of listed IT Services companies were up 3.5 per cent Y-o-Y in Q3FY24, growing at the slowest pace in the last 14 quarters.
Asset utilisation remains low
Weak aggregate demand means that BS1000 companies’ asset or capacity utilisation is still lower than 15 years ago. The revenue-to-asset ratio of BS1000 companies was 101 per cent in the first half of FY24, down from 113.5 per cent in FY23 and lower than FY14’s 104 per cent and FY09’s 115 per cent. However, it is an improvement from 87.2 per cent in FY16.
For comparison, revenue-to-asset ratio was 125.4 per cent on average during the FY03 to FY09 period. The combined assets of BS1000 companies had clocked a CAGR of 25 per cent in this period and their revenues had expanded at a CAGR of 24.5 per cent in these six years.
Many experts, however, see the first signs of a revival in corporate capex in select sectors such as automobile, capital goods, cement, electronics, and electric vehicles (EVs) driven by factors such as higher government capex in infrastructure and subsidies such as production-linked incentive (PLI) schemes.
“With an expected Rs 5-7 trillion capex, emerging sectors like EVs, semiconductors and electronics will likely contribute 20 per cent to the overall industrial investment in the next four financial years,” said CRISIL’s Mehta.
Companies in quite a few sectors speeded-up capex in FY24. The combined assets of automakers and their suppliers were up 14 per cent Y-o-Y in H1FY24. Other large sectors with double-digit growth in capex include pharmaceuticals (up 19.5 per cent), capital goods (up 11.9 per cent), media & entertainment (up 83.1 per cent) and retail (up 30.1 per cent).
In contrast, companies in sectors such as oil & gas, power, telecom, mining & metals and textile & garments reported a deceleration in asset growth in H1FY24.
There is, however, a risk of fiscal drag on growth and investments going forward. According to the Union government’s Interim Budget for FY25, the capex on roads & highways, railways and defence is projected to grow by 5.3 per cent in FY25, compared to three-year CAGR of 26 per cent. The overall government expenditure net of interest payment is projected to grow by 4.1 per cent next financial year, much lower than 10.5 per cent growth in nominal GDP.
It has to be seen if corporate India overcomes this challenge and rides the wave of faster growth in headline GDP, buoyant capital markets and large investments in emerging sectors to kickstart a new cycle of capex-led growth.
