India Inc going slow on capex growth: Indian businesses are showing hesitance to invest due to global macroeconomic challenges and the subsequent slowdown which could impact demand recovery and affect the growth prospects of the economy. Chief Economic Advisor V. Anantha Nageswaran has urged companies to boost investments and not just focus on repairing their balance sheets, despite ongoing demand uncertainties expected to persist into the next decade.
After initial signs of post-COVID recovery, companies face renewed uncertainty, leading to a pause in capital expenditure (capex). In November, Policy Circle reported this trend. However, at a recent Confederation of Indian Industry (CII) event, CEA Nageswaran advised Indian businesses not to wait for these uncertainties to fade, likening it to waiting for ocean waves to calm before swimming.
Analysts, including CEOs and promoters, lack confidence in India’s future, as reflected in their limited economic investments. Economists Nikhil Gupta and Tanisha Ladha of Motilal Oswal noted a 6.2% decline in corporate investments from April to June compared with the same period in 2022. With investments at 12.3% of GDP, it marks the lowest for any first quarter in the past decade. Moreover, corporate investments now constitute only 41.2% of the total, down from around 50% pre-COVID.
Bank of Baroda economists highlight a longer-term slowdown in corporate investment growth. Analysing the balance sheets of 3,420 companies, they found an average growth of 4.9% per year from 2017-18 to 2022-23, significantly lower than India’s nominal economic growth of 9.8% per year. Economist Madan Sabnavis attributes this investment reluctance to fundamental economic issues like high unemployment and low productivity in existing jobs, leading to underutilisation of capacity.
Contrastingly, investment growth is currently driven by significant increases in government spending, with Union and state governments’ investments growing by 45% and 65%, respectively, compared with April-June 2022.
The rationale for boosting investments is clear: investments stimulate employment, income generation, and consumption, which then cycle back into further investments. Balancing economic growth between consumption and investment is critical, with consumption ideally being a result of this growth cycle. Corporate investment delays could further postpone this cycle.
Amid this, the government, supporting the Reserve Bank of India’s cautious stance, advises restraint in lending. Union Finance Minister Nirmala Sitharaman has recently counsellednon-banking financial companies (NBFCs) and small finance banks on vigilant lending practices, reflecting a cautious approach to capacity expansion among India’s leading companies.
Corporate revenue growth slowdown since last year is affecting India Inc’s capital expenditure. A strong correlation exists between net sales growth and fixed asset investments. In H1FY24, the net sales of 725 companies (excluding BFSI and state-run oil & gas firms) saw the lowest half-yearly increase in three years, sharply down from previous growth rates. This revenue decline, coupled with a slowdown in government lending, impacts corporate capex growth. However, the government acknowledges multiple factors causing corporate caution, including infrastructure gaps, compliance burdens, and financial sector lending reticence. The CEA notes that the government is addressing these issues.
The International Monetary Fund (IMF) has praised some government reforms, such as flexible inflation targeting and bankruptcy code implementation, for supporting India’s economic expansion. For India’s economic policy, incentivising private investments is a top priority, essential for achieving key goals like job creation and a more formal economy. Without active private sector participation, India’s growth potential remains unfulfilled.
India’s economic recovery is at a crossroads with investment apprehensions of private sector casting a shadow over the nation’s growth prospects. Analysts paint a complex picture of corporate reticence in the face of global economic headwinds and domestic challenges. As government initiatives strive to counterbalance this trend, robust private sector response becomes increasingly possible, bolstering investments to catalyse a cycle of growth and prosperity.