Cautious on capex

After being moribund for a while, the investment leg of the Indian economy has shown signs of life lately. CSO’s latest GDP release showed gross fixed capital formation expanding by 11.2 per cent in the first half of FY19 from 3.4 per cent in the same period last year. But a BusinessLine analysis ( India Inc shying off capacity additions , January 14) of corporate India’s capacity additions suggests that this capex revival is far from broad-based. The net fixed assets of listed firms expanded by 8 per cent in the year ended September 2018 and even these additions were concentrated in a handful of Nifty and PSU names. This suggests that the ongoing revival may not gather steam at quite the pace that the government would like, to showcase a strong economy in an election year.

But India Inc’s cautious approach to embarking on the next capex cycle is to be welcomed. In retrospect, the investment binge that saw India’s gross fixed capital formation race ahead at 13 per cent annually between FY03 and FY12 had all the characteristics of a bubble. Fuelled by excess global liquidity, easy bank credit and a global commodity super-cycle, India Inc added massive capacities in mining, metals and power generation based on over-optimistic estimates of the domestic infrastructure build-out and Chinese demand. But with the global commodity super-cycle popping and the domestic downturn hitting demand, the excesses of that period have cost the economy dear. Indian banks are still grappling with salvaging what they can from those mothballed assets and most of India’s big-name industrial houses are today either in debt distress or lined up before the NCLT fighting bankruptcy cases. Given that the process of creative destruction is still far from over, these players are unlikely to embark on capex anytime soon. A precarious commodity cycle and Chinese hard-landing worries also make it desirable for India to rely on an entirely new set of entrepreneurs, in unconventional sectors, to drive its next investment cycle.

The government can help this process along by not tying up successful FDI-funded private ventures in bureaucratic red tape, reining in tax terrorism and removing land, labour and capital cost impediments in the way of ongoing projects. PSUs in energy, infrastructure and mining continue to have the balance sheet strength and the appetite to undertake the next round of capex too. But for their investments to materialise, the Centre will need to desist from its constant attempts to strip them of their cash balances through dividends, buybacks and forced acquisitions to fill its budget coffers. The recent slowdown in private consumption, evident from high-frequency data on industrial production, durables and car sales, could further delay the capex revival. This suggests that the Centre cannot afford to take the eye off the ball on measures to boost consumer confidence and put more money in the hands of taxpayers.

COMMENT NOW