Capex stirs in Q3, but is not broad-based yet

Capex Revival?

Public and private sector firms announced projects worth a combined ₹6.1 trillion during the December quarter, up 44% year-on-year, the CMIE data showed. This was the highest in three quarters and the second highest since 2020.Capex announcements in the private space were even more robust, more than doubling in a year. Government sector project announcements were down around 70%.

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The overall capex pipeline in 2022-23 so far has now risen to nearly ₹15 trillionsurpassing pre-pandemic levels for the first time for the first nine months of a fiscal year.“With deleveraging in the last few years and rising capacity utilization, the ground is favourable for private capex revival,” said Rajani Sinha, chief economist, CareEdge. “Moderation in global commodity prices is anotherfactor favourable for capex revival.” However, she believes the pace of pick-up in private capex could be gradual amid the global slowdown and uncertain economic environment.

Completions Under Way

It’s notjust a revival in terms of intent to expand capacity—more pending projects are also getting completed. The project completion rate had slowed down in the years impacted by multiple waves of the pandemic, but has improved gradually since then.

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Projects worth ₹1.4 trillion got completed in the December quarter, compared with ₹1.3 trillion in the preceding three months. However, this is just half the value of projects completed in the same quarter a year ago. Also, the private and public sectors had a divergent show: while the value of projects completed in the private sector fell 14% sequentially, the same jumped 16% for the government sector.

“It is imperative to note that announcement [of projects] has to be followed up with execution,” said Anitha Rangan, economist, Equirus. “India’s capex announcements have been ambitious with execution lagging. This leads to cost overruns and delays.”

Sectoral Show

Prima facie, the investment mood appears to have revived, but evidence for a broad-based recovery is still scant. Sample this: Almost 84% of the investment proposals announced during the quarter came from the manufacturing space. Investments in this sector more than doubled to ₹5.1 trillion over the past two quarters. Only the services sector (other than financial) saw a rise in investment. Sectors such as construction and real estate, mining, and electricity saw a sharp drop in project announcements, by up to 85% sequentially.

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In manufacturing sector, chemicals led capex announcements with a 50% share; machinery (40%) followed. Prominent projects included a ₹50,000-crore green hydrogen, ammonia and renewable energy plant by ABC Cleantech and a similar ₹45,000-crore project by Avaada Ventures—both in Karnataka.

Skewed State

There isanother hint of a not-so-broad recovery. Of the total value of capex projects announced in 2022-23 so far, as much as 64% comes from just Karnataka, Odisha and Maharashtra. Karnataka saw new investment proposals worth ₹4 trillion, while Odisha saw investments worth ₹3.5 trillion being announced during April-December 2022. Some top projects in these states included the aforementioned green hydrogen project in Karnataka and a semiconductor fab in Odisha.

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On the disparity, Rangan said states were lagging in spending on their own “driven by thefactthat the states’ fiscal position needs some hand-holding and cleaning up”.

The support of states in the capex boost will be significant for a broad-based recovery since several projects and investments under the National Infrastructure Pipeline or the production-linked incentives are to be implemented via states and may also have to be partially funded by them, Rangan pointed out.

Shrinking Dominance

Nonetheless, theworries around large business houses such as ones led by the Tatas, Mukesh Ambani and Gautam Adani cornering the investment bandwagon could be ebbing. They accounted for only 14% of the total value of private sector projects announced in Q2FY23, down from 35% in Q1FY23. This share had dropped to single digit in September 2022.

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But, this is not enough to indicate a broad-based revival. “Given the uncertain economic environment, mid- and small-sized corporates would continue to be hesitant to join the capex cycle,” Sinha noted.

Meanwhile, as long as domestic demand still gains momentum, rising interest rates may not have a significant dampening effect on investments. “The more worrisome aspect is the global slowdown and its repercussions on the Indian economy,” Sinha said.