You are currently viewing How to play India’s capex story

How to play India’s capex story

  • Post author:
  • Post category:Posts

An economy thrives when there is spending across the board. In a consumption-led economy like India, you need private and public consumption to grow every year. That is expected to trigger demand for goods and services and enhance productivity. If you look at the government data, since COVID-19, the government has done a lot of heavy lifting on capital expenditure. Private expenditure led by businesses struggled due to poor consumption demand. So, India’s economy had to rely on the government spending on infrastructure.

Things are changing now. A Reserve Bank of India study published in the latest monthly bulletin highlights pick-up signals in investment activity. The study credits improved capacity utilization, pick-up in credit demand and positive feedback from the forward-looking enterprise surveys. About 547 projects costing Rs 2,66,547 crore got assistance from banks in the financial year 2022-23. It is against 401 projects costing Rs 1,41,976 crore in 2021-22.

The infrastructure sector accounted for 60% of the total costs of projects for 2022-23. That includes power, telecom, ports and airports, storage and water management, special economic zone (SEZ), industrial, biotech and IT parks, and roads & bridges.  

Another analysis by India Ratings, an affiliate of global ratings agency FITCH, argues that the Indian economy is on the cusp of a new private capex cycle.  “The study indicates that capex sanctions could lead to a decadal-high capex spend in FY24,” a release said recently. “While there is a steady uptick in project sanctions across all ticket sizes, there could be a significant push from large (over Rs 1,000 crore ticket size) projects in this cycle,” it added.

A strong pick-up in private corporate capex is good news for the Indian economy. The Gross Fixed Capital Formation (GFCF needs to grow steadily for the economy to generate productive growth.

According to the RBI study, GFCF, contributing around 34 per cent to GDP – accelerated by 11.4 per cent in 2022-23. The strong performance of capital goods and infrastructure segments boosted growth. In terms of sectors, investment in dwellings, other buildings and structures comprise a majority of fixed investment by the government and household sectors. At the same time, machinery, equipment and intellectual property products have a large and growing share of private non-financial corporations in GFCF.

The RBI study finds a relationship between bank project finance and the GFCF. “The long-term relationship suggests that a 1% increase in investment intentions may lead to a 48bp increase in the GFCF of private corporates,” the India Ratings release said. There is a significant interest in new projects from the private sector. If one considers Larsen & Toubro, the engineering giant, as a benchmark, you can perhaps note the change on the ground. The company recently told the media that the private sector orders are now a third of the total order book. That is lower than the more than 40% peak but higher than witnessed in recent times. That shows an upward tick in private sector projects. You can pick companies in multiple sectors that ride on the economic growth. Alternatively, you can use technology to help you identify the right businesses.

Thank you for reading this post, don't forget to subscribe!