Government Capex Leads The Way. Will Private Capex Follow?

Government capital spending in the April-June quarter held strong. How soon will private capex follow?

Concrete mixer trucks at a flyover construction site in Patna, Bihar, India. (Photographer Anindito Mukherjee/Bloomberg)
Concrete mixer trucks at a flyover construction site in Patna, Bihar, India. (Photographer Anindito Mukherjee/Bloomberg)

As the economy attempts to recover from the Covid crisis, capital expenditure — which leads to a virtuous cycle of jobs, incomes and demand — is critical. To kick-start the cycle, the government, in the budget announced in February 2021, had nudged up the share of capital expenditure to the highest on record.

Then came the second Covid wave and disrupted plans.

Still, the government capital spending in the April-June quarter was the highest on record, according to data available from the Controller General of Accounts.

The government spent Rs 1.1 lakh crore in capital expenditure in the April- June 2021 quarter, a rise of 26.3% from Q1 FY21 and an increase of 77% from Q1 FY20, the CGA data showed.

The spending, at about 20.1% of the budget estimate of Rs 5.5 lakh crore for the full financial year, still leaves ample space for capex support to the economy in the coming quarters.

"We see India at the cusp of a multi-year capex cycle, similar to that seen in FY03-12," said a research note by BofA Securities dated Aug. 2, 2021. It expects $356 billion of orders to be awarded over two years — a growth of 14% in FY22 and a rise of 7% in FY23, mainly led by government capex which is expected to comprise 80% of orders.

The initial burst of spending this fiscal has come through top spending ministries like roads and railways.

  • The Ministry of Roads has spent 42% of its budgeted Rs 1.18 lakh crore. It has spent 43% of its planned capital expenditure, the CGA data showed.

  • The Ministry of Railways has spent 24% of its budgeted Rs 1.10 lakh crore. A similar amount of the capex spending earmarked has been spent.

  • The Ministry of Rural Development has spent 33% of its budgeted Rs 1.31 lakh crore, although all of this falls under the 'revenue expenditure' category, according to the CGA.

  • The Ministry of Urban Development has spent 21% of its budget, and 20% of what was earmarked for capital spending.

The spending across these sectors is visible in demand for credit as well.

According to Dinesh Kumar Khara, chairman of State Bank of India, the government spending is supporting activity in the roads and construction sectors, which had led to some traction across these industries.

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Will Private Capex Follow? Not Immediately, But....

The key question is whether private capex will follow government capex and when?

At an aggregate, capacity utilitisation was at just under 70% in the January-March quarter. Historically, private investment only picks up once capacity utilisation reaches over 75%. The second wave would have pushed capacity utilisation back down, at least temporarily. As such, a big pick-up in private capex may be some time away.

"We have generally seen that investment demand coming back is a major function of credit growth picking up," Khara said. "So far, bank credit to industry shows no such signs."
Government Capex Leads The Way. Will Private Capex Follow?

However, green shoots are visible in certain industries where capacity utilisation is higher than average.

Capex is still sectoral, said Chandrakant Salunkhe, president of the SME Chamber Of India. While private investments have picked up in food processing units and pharmaceuticals, for instance, it has not picked up auto parts, he said.

Suman Chowdhury, chief analytical officer at Acuité Ratings & Research, said that new projects have picked up in some sectors such as metal and metal products, primarily steel. The project announcements in the metal sector have picked up to Rs 22,034 crore in Q1FY22, he said, citing data from the CMIE. "This is also validated by the data from our rated clients in the sector, many of whom are already operating at high capacity utilisation."

Isha Chaudhary, director at Crisil Research, also said industrial capex in FY22 is expected to be driven by large players in core industrial sectors such as steel, cement and non-ferrous metals as they continue to operate at healthy utilisation levels — higher than optimum level. These sectors have also deleveraged balance sheets, which can now support fresh investments.

Utilisation for top five players in steel was at 81% compared with 62% for the rest of the sector in FY21. In cement, utilisation for top five players was 71%, compared with 54% clocked by the rest. Similarly non-ferrous players have also operated at over 95% utilisation, thereby announcing capex plans.
Isha Chaudhary, Director, Crisil Research

Another sector showing a pick-up is the chemicals sector where new project announcements stood at Rs 40,875 crore in the last quarter, Suman Chowdhury said.

Export-oriented industries are another segment where investment could begin as a strong global economy pushes up demand.

Sharad Kumar Saraf, past-president of the Federation of Indian Export Organisations, said that there is no doubt that major exporters are expanding. Downstream companies are expanding where they are able to, he added.

Arun Garodia, vice chairman at Engineering Exports Promotion Council, also said that apart from the fact there is "no dearth of export orders," there is also a renewed preference for India over China. This could push up investments in capacity. For sectors such as chemicals and pharmaceuticals as well, Isha Chaudhary said, the strategy to de-risk supply chains away from China is helping boost demand and investments.

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Public Sector Will Dominate

For now though, the public sector remains dominant in capital spending.

The government projects under implementation amounted to Rs 85.4 lakh crore in Q1FY22 or 68% of all projects under implementation, compared with Rs 39.82 lakh crore worth of total private sector projects, or 32% of all projects, said Suman Chowdhury, citing CMIE data.

The government along with capex from public sector enterprises will remain high due to the projects that had been announced over the last few years, Suman Chowdhary said. However, participation of the private sector in the emerging capex cycle is set to increase over the medium term, he said.

Private sector capex will see green-shoots but its contribution will be muted at 20% of FY22-23 orders, according to estimates by BofA Securities. "Private sector and PSUs are expected to accelerate capex cycle growth from FY24 onwards. The government opening up large monopolies within gas & power distribution, railways and mining, would mainly drive private capex," it said.