Capital expenditure outlay by the government for FY24-25 has been announced at ₹11.11-lakh crore. This is a 11 per cent increase over previous year’s budget announcement of ₹10-lakh crore or a ₹16 per cent over ₹9.5-lakh crore revised estimates. This marks a return to normalised growth in spending after a stellar period when capital expenditure by the central government has grown at 26 per cent CAGR in FY19-24.

Capex by Central Government

Capex by Central Government

The Center’s aim to rein in fiscal deficit is well supported with the current outlay. As government driven capital formation reverts to a normal, there are several positives supporting a case for the private sector to pick up the capex baton.

Private capex to bounce back

According to a recent report on Indian Economy by Department of Economic Affairs, private capex has grown at 8.5 per cent CAGR in FY19-23 to ₹6 lakh crore. With an outlook of lower cost of borrowing once interest rate cuts begin in FY25 and better balance sheet’s, the growth may accelerate further.

Firstly, crowding out effect is expected to recede. As borrowing needs of government temper down, scope for private borrowing can expand. The budget announced a fiscal deficit of 5.8 per cent for FY24, which is a 10 basis points lower than expected. The fiscal deficit expected for FY25 is at 5.1 per cent, which aligns with the FY26 target of a fiscal deficit below 4.5 per cent. The market widely expected a fiscal deficit of 5.3-5.4 per cent for FY25 and estimate of 5.1 per cent bettering that should indicate a strong resolve to reign in government borrowings.

With lesser than expected supply of public debt, yield to maturity should improve and the 10-year bond yield has already contracted 10 bps on the day of announcement. This should translate to not only lower cost of borrowing for companies but also a lower cost of consumption for demand. Also, while benchmark rates in US and India continue to remain at a higher level, CY24/FY25 is expected to see the first of the rate cuts.

Secondly, private companies’ balance sheets are better placed. In our recent article published in bl.portfolio edition dated January 28 (tinyurl.com/PvtCapex ; Room for capex boom), out of of 1,700 companies analysed for the period FY19-H1FY24 we reported that so far the pace of asset addition matches pace of revenue growth at around 7 and 8 per cent respectively. The companies return ratios are at a multi-year high with RoEs expanding 400 bps to 15.6 per cent by H1FY24 from FY19.

The leverage metrics have also improved to a comfortable 2.5 times net debt to EBITDA in H1FY24, contracting significantly from 4.2 times in FY19. The improvement in leverage and RoE was primarily driven by a 600 bps expansion in EBITDA margins in the period. This points to a wide room in balance sheets to accommodate further investments for growth, at the exact time that the central government capex expenditure growth rate is tapeing

Finally, core sector momentum is expected to continue. A 2-crore affordable housing program announced in current budget can sustain the momentum in housing sector. Railways, Roads and Logistics continue to occupy prime space for government spending in the current budget outlay as well. The multiplier effect from continued investment in core sectors should support demand growth for India Inc as well.

What is needed now is for private sector to start filling up the gap left by the government in terms of momentum in capex growth. The government has done the heavy lifting since covid-19 hit. The private sector has the balance sheet strength to take it forward from here. When and how they do it are the key factors to watch out for.

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