Of late, there has been a twist to the narrative that private companies are stubbornly aloof to making fresh investments or are excessively wary. Large conglomerates such as the Tata Group, Reliance, Adani and Aditya Birla have in recent months unveiled major investment decisions. Capex plans are being lined up by these and a number of other leading private companies in not only assorted infrastructure sectors and traditional industries but also in newer areas like semiconductor fabrication and green hydrogen. Overall capacity utilisation is close to the magic threshold of 75%. The share of private sector in “newly announced investment projects,” as per the CMIE data, has been above 80% over several recent quarters and crept up to 87.4% in Q3FY24, a steep recovery from the sector’s sub-70% share (as low as 54.4% in Q1FY22) for many quarters till Q1F23.
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Agreements for external commercial borrowing (ECB) signed up by Corporate India rose to $29.8 billion during April-October this fiscal, as compared to $12.4 billion in the year-ago period. Actual ECB inflows rose in tandem, indicating that the trend has consolidated. All this would give credence to the notion that not just “elevated” public investments, but the incipience of a new private capex cycle too may have been behind the current spurt in gross fixed capital formation (GFCF). If it indeed has risen to 34.1% of the GDP in FY24, as forecast by the National Statistical Office in the second advance estimate, it would be at the highest level since the peak of 34.3% seen in FY12. GFCF at 35% is what many economists reckon would produce economic growth of 7% on a durable basis.
While investment announcements by Corporate India are promising, as pointed out by HSBC Global Research, the current projects are led more by real estate demand (“dwellings and structures”). Incremental pace in the “machinery and equipment” category, that represents industrial investments, is trending below its typical share of 40% in the overall investment pie. The perception that public capex has seen phenomenal rise in recent years also needs correction, as what’s has actually happened is a compositional shift. Overall public capex is still trailing the pre-pandemic level. The sharp rise in the Centre’s budget capex was, to a certain extent, at the expense of investments by Central PSEs and the state governments. The states’ capex, thankfully, has gained pace in the current fiscal and may remain strong in FY25 as well, while CPSEs may take longer to regain the lost ground.
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Apart from the fact that the construction sector (real estate) rather than the demand for manufacturing goods has principally driven private investment as yet, the prospect of durable capital formation is also dented by the debilitation of the investment potential of the informal-sector players. The government is wooing investors with production-linked incentives in areas where it thinks India’s manufacturing potential is high but remains largely untapped. It is also offering viability gap funds in sectors which investors find riskier or where doubts persist about reasonable return on equity, like battery storage systems for renewable energy and affordable housing. While these are welcome initiatives, any policy impetus aimed at creating a “virtuous cycle of investments” must accord top priority to improving the profile of MSMEs. Correcting the consumption pattern, which has tilted more towards the premium and high-end segments post-pandemic, is integral.
Of late, there has been a twist to the narrative that private companies are stubbornly aloof to making fresh investments or are excessively wary. Large conglomerates such as the Tata Group, Reliance, Adani and Aditya Birla have in recent months unveiled major investment decisions. Capex plans are being lined up by these and a number of other leading private companies in not only assorted infrastructure sectors and traditional industries but also in newer areas like semiconductor fabrication and green hydrogen. Overall capacity utilisation is close to the magic threshold of 75%. The share of private sector in “newly announced investment projects,” as per the CMIE data, has been above 80% over several recent quarters and crept up to 87.4% in Q3FY24, a steep recovery from the sector’s sub-70% share (as low as 54.4% in Q1FY22) for many quarters till Q1F23.
Agreements for external commercial borrowing (ECB) signed up by Corporate India rose to $29.8 billion during April-October this fiscal, as compared to $12.4 billion in the year-ago period. Actual ECB inflows rose in tandem, indicating that the trend has consolidated. All this would give credence to the notion that not just “elevated” public investments, but the incipience of a new private capex cycle too may have been behind the current spurt in gross fixed capital formation (GFCF). If it indeed has risen to 34.1% of the GDP in FY24, as forecast by the National Statistical Office in the second advance estimate, it would be at the highest level since the peak of 34.3% seen in FY12. GFCF at 35% is what many economists reckon would produce economic growth of 7% on a durable basis.
While investment announcements by Corporate India are promising, as pointed out by HSBC Global Research, the current projects are led more by real estate demand (“dwellings and structures”). Incremental pace in the “machinery and equipment” category, that represents industrial investments, is trending below its typical share of 40% in the overall investment pie. The perception that public capex has seen phenomenal rise in recent years also needs correction, as what’s has actually happened is a compositional shift. Overall public capex is still trailing the pre-pandemic level. The sharp rise in the Centre’s budget capex was, to a certain extent, at the expense of investments by Central PSEs and the state governments. The states’ capex, thankfully, has gained pace in the current fiscal and may remain strong in FY25 as well, while CPSEs may take longer to regain the lost ground.
Apart from the fact that the construction sector (real estate) rather than the demand for manufacturing goods has principally driven private investment as yet, the prospect of durable capital formation is also dented by the debilitation of the investment potential of the informal-sector players. The government is wooing investors with production-linked incentives in areas where it thinks India’s manufacturing potential is high but remains largely untapped. It is also offering viability gap funds in sectors which investors find riskier or where doubts persist about reasonable return on equity, like battery storage systems for renewable energy and affordable housing. While these are welcome initiatives, any policy impetus aimed at creating a “virtuous cycle of investments” must accord top priority to improving the profile of MSMEs. Correcting the consumption pattern, which has tilted more towards the premium and high-end segments post-pandemic, is integral.
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Who’s investing? Creating a “virtuous cycle of investments”
10
1
22.03.2024
Of late, there has been a twist to the narrative that private companies are stubbornly aloof to making fresh investments or are excessively wary. Large conglomerates such as the Tata Group, Reliance, Adani and Aditya Birla have in recent months unveiled major investment decisions. Capex plans are being lined up by these and a number of other leading private companies in not only assorted infrastructure sectors and traditional industries but also in newer areas like semiconductor fabrication and green hydrogen. Overall capacity utilisation is close to the magic threshold of 75%. The share of private sector in “newly announced investment projects,” as per the CMIE data, has been above 80% over several recent quarters and crept up to 87.4% in Q3FY24, a steep recovery from the sector’s sub-70% share (as low as 54.4% in Q1FY22) for many quarters till Q1F23.
Also ReadFlexibility to invest across large, mid and small cap stocks: Go for flexi-cap funds to manage risks
Agreements for external commercial borrowing (ECB) signed up by Corporate India rose to $29.8 billion during April-October this fiscal, as compared to $12.4 billion in the year-ago period. Actual ECB inflows rose in tandem, indicating that the trend has consolidated. All this would give credence to the notion that not just “elevated” public investments, but the incipience of a new private capex cycle too may have been behind the current spurt in gross fixed capital formation (GFCF). If it indeed has risen to 34.1% of the GDP in FY24, as forecast by the National Statistical Office in the second advance estimate, it would be at the highest level since the peak of 34.3% seen in FY12. GFCF at 35% is what many economists reckon would produce economic growth of 7% on a durable basis.
While investment announcements by Corporate India are promising, as pointed out by HSBC Global Research, the current projects are led more by real estate demand (“dwellings and........
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