Capex questions: Centre must do the heavy-lifting, private sector will wait

That’s a huge increase when juxtaposed against the estimated GVA increase for the economy of around 15-16%.

Finance minister Nirmala Sitharaman’s assertion last week that the government will not trim capital expenditure from the budgeted levels and also any re-prioritising of expenditure in the wake of the pandemic would not hurt the outlay is re-assuring. The government needs to spend given private sector will stay cautious for some more time. Moreover, the states are strapped for funds; for 15 major states, the capex in the June quarter was about 1% smaller than in the corresponding quarter of FY20.

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The total capex outlay (including spends by PSUs financed through internal and extra-budgetary resources) was increased by a modest 8.7% over FY2020-21 and 4.8% over FY2021-22; however, the increase in direct government spending on capital expenditure in FY2022BE is a good 26%, at Rs 5.5 lakh crore. While, for the key infrastructure sectors, the total public sector expenditure will see a decline of 3%, that should be made up once the proceeds from the National Monetisation Plan (NMP) come through. The current year’s target from the NMP, of around Rs 88,000 crore, will allow the government to allocate more resources towards capex, though how much exactly, it is too early to tell.

For fixed capital formation to increase, however, the private sector needs to chip in. Although corporate India has deleveraged significantly, driven by improved profitability in stressed sectors such as metals and power, capex is slow. An analysis by Credit Suisse shows the share of debt (excluding auto), with an interest cover of less than one, fell to roughly 32% for the past four quarters, the best reading in the last seven years.

Indeed, thanks to some big cost-cutting, India Inc reported record profits in FY21 and cash-flows are robust. Profits for a set of 3,021 companies (including banks and financials), for the three months to June, were strong while the sum of the ebitda and wages (a proxy for gross value added, or GVA) jumped nearly 48% year-on-year. That’s a huge increase when juxtaposed against the estimated GVA increase for the economy of around 15-16%.

However, although they may have room to borrow and interest rates are at multi-year lows, it doesn’t necessarily mean a big turn in the capex cycle. For one, capacity utilisation remains at around 69% levels. This is somewhere close to the pre-pandemic level and not particularly bad given the deleterious impact of Covid-19. One must remember that capacity utilisation has stayed well below 75% for the better part of the last eight years since FY13. Gross fixed capital formation (as a share of GDP), which was at 34.1% in FY13, slipped all the way to 30.8% in FY17 before recovering gradually to 32.5% in FY20.

In the last few years, it is primarily the government that has supported capex. The private sector will also wait for better visibility on consumption demand to assess whether it will sustain at meaningful levels once all the pent-up demand has been satiated. To be sure, not all capex has come to a standstill; several greenfield ventures are being pursued in sectors such as steel, cement, capital goods and distressed assets continue to be purchased. Moreover, there is no denying that there is good interest in some of the PLI (production-linked initiative) schemes. But the flows need to be bigger, mere driblets are not enough.