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Pvt sector capex likely to expand amid expectations of high growth: Experts

May 12, 2024


New Delhi: Private sector capital expenditure is likely to see a gradual expansion amid expectations of high growth though geopolitical uncertainties and tepid consumption remain a concern, say economists.

CII’s business confidence index touched a 12-quarter high in Q4FY24, with 51% of firms expecting capacity utilisation of 75% and above. Moreover, 71% expect an improvement in private capex in the first half of FY25 compared with the second half of FY24.

Private investment proposals sanctioned by banks rose by nearly Rs 1 lakh crore to Rs 3 lakh crore in the last year alone, according to India Ratings and Research (Ind-Ra).

Indian economy is expected to grow 6.8% this fiscal, according to the International Monetary Fund (IMF), following a strong 7.6% expansion in FY24.

“Businesses understand that there is not going to be complete peace across the globe,” said Sunil Kumar Sinha, principal economist, Ind-Ra. He said companies are now preparing plans keeping in mind some of these scenarios including how oil at $100 a barrel will impact capex or demand. “All of these are getting baked into their strategy formulation,” Sinha added.

At a recent NCAER event, chief economic advisor V. Anantha Nageswaran noted a drawing down of surplus by the private sector, indicating a recovery in private capex.

Gross fixed capital formation grew 10.2% in FY24, but it was largely driven by government capital expenditure. Companies with mostly domestic presence are expected to lead the revival in private capex.

“There are certain sectors like cement and steel, which have already invested quite a bit, certain segments of the auto industry, and certain areas of pharmaceuticals and chemicals where they have to run into capacity constraints,” said Abheek Barua, chief economist, HDFC Bank. He expects investments to continue in some sectors like electric vehicles.

Demand concern

Subdued demand is a concern and continues to weigh on investment sentiment. Private consumption rose 3% in FY24. “There is considerable trepidation about what is happening to mass market consumption,” said Barua, adding that all domestic consumer-facing companies would be very careful about adding capacity. “I think they will hold back for a while.”

Experts have been pointing to a K-shaped recovery in consumption — luxury segments have done well but mass market consumption has remained sluggish.

“The demand conditions will have to remain much stronger for much longer for capex to pick up,” said Dhiraj Nim, economist, ANZ.

Rising input cost amid a surge in mental prices are also seen as an overhang on corporate sector sentiment.

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