A Slow Climb: Private Capex Is Yet To Show Signs Of A Sustainable Pick-Up

A pick-up in private capex remains slow and measured.

Industrial investment proposals were at Rs 2,11,742 crore up to May 2022 in the current calendar year, according to monthly data published by the Department of Promotion of Industry and Internal Trade. That's 27.4% of the proposals worth in entire 2021.

Comparable data for investments up to May 2021 was not available.

475 proposals were received in the calendar year up to May, compared with 1,489 in all of last year, according to the department.

To be sure, an investment proposal may not necessarily be implemented.

Investment proposals for 2021 rose about 13% from 2019 levels, according to Teresa John, lead economist at Nirmal Bang. However, investment proposals in the January-March quarter of 2022 are still below the 2020 level. This suggests that the Omicron wave may have had some impact, she added.

According to the Centre of Monitoring Indian Economy, too, new investment announcements rose to Rs 3.82 lakh crore in Q1FY23, half of the estimated Rs 7.78 lakh crore in Q4FY22. Still, it was higher than new investments in the same quarter in the preceding two years.

Dipanwita Majumdar, economist at Bank of Baroda, said the emerging picture on investment is one of cautious movement in certain sectors and is not yet broad-based. This is corroborated by more retail-oriented growth in bank credit so far. Debt issuances have been lower with two-thirds being issued by finance companies and external commercial borrowings also are lower, she added.

Most capex indicators are in the positive territory, driven by the government’s capex push, John said, adding that a pick-up in capacity utilisation along with a favourable real interest rate environment bodes well for the private corporate capex cycle. "Nevertheless, we do not anticipate acceleration in private corporate capex until such time capacity utilisation moves closer to 80%."

Capacity utilisation was above its long-term average, rising to 75.3% in the January-March from 72.4% in the previous three months, according to the RBI's survey.

In terms of new capex, chemicals and metals lead with half of all investment proposals by value in 2022 up to May, according to data by the Department of Promotion of Industry and Internal Trade.

Electrical equipment accounts for about a tenth of the proposals and pharma 2% of all proposals—both benefit from production-linked incentives, according to John. Food processing and textiles have seen their share rise, most likely supported by the PLI scheme, she said.

Among states, Odisha led, attracting 28.5% of all investment proposals.

The higher interest rate scenario and inflation amid continued global political uncertainty will be factors that will drive the pace of investment in the coming months, Majumdar said.

In response to falling interest rate cycle, interest coverage ratio of companies improved in FY21 and in FY22. However, capacity utilisation was low and signs of strengthening demand were evident only by the January-March quarter this year, she explained. Now, inflation has taken centre stage, and a rise in interest rates could become drag on capex, she said.

While capex should pick up, it will continue to be driven by government spending, Majumdar said.