A Reality Check
Economists are predicting a potential virtuous capital expenditure (capex) cycle to kick in globally including India as we emerged from the pandemic. If lower interest rates and monetary support didn't lead to a large capex cycle post the 2008 financial crisis, why are analysts update this time around ?
Corporates are less leveraged today compared to 2008. Indian corporates repaid debts of more than ₹1.5 trillion. Companies are also more confident of durable fiscal and monetary support. Households have large excess built during Covid - $1.7 trillion dollar in the US and roughly $300 in India as per UBS report. Lastly, corporates are sitting on a large cash pi - S&P 500 firms' cash has soared from $1 trillion pre pandemic to $1.5 trillion now.
But Data over the past couple of days paint a diversion picture of the economy. On the macro front exports was strong in December. The manufacturing sector remained in expansionary mode even the growth moderated. The value of new project announcements in the latest quarter was 1.4 times the year-ago period when the country was recovering from the first string of lockdowns. The year 2021 ended with an average quarterly figure that was still almost half of the pre-pandemic levels of 2019.
Currently, the Centre for Monitoring Indian economy ( CMIE) warn that the unemployment rate has reached a 4-month high. Automobile sales in December 2021 were weaker than expected. Retail and wholesale passenger vehicle and two-wheeler sales declined from the year-ago month in December. If the current momentum continuous, there could be downside risks to our estimate for FY22 across most OEMs (Original Equipment Manufacturer). Demand for entry-level vehicles continues to remain muted. Price hikes, high fuel prices and delayed harvest have tempered demand in rural market. Note that consumption in rural markets slowed amid unseasonal rains and crop damage in several parts of the country.
There are some silver linings. The governments capex spending plans looked positive as new project announcements rose 57% sequentially to ₹42.384 crore. This was a 36% jump on a year-on-year basis. Both central and state government projects jump sequentially by 68% and 17% respectively. At the same time, capacity utilisation for corporate India is at an all-time low. From a peak of 83% in 2010, when capex was running hot, utilisation levels declined to 70% just before the pandemic, and further to 60% in June 2021 as per the RBI's latest OBICUS data .
Capex is funded either from fresh debt or equity issues from accumulated cash. Large firms are repaying debt. Though IPOs are booming, they form a small fraction of Corporate fundraising. And historically, higher cash does not predict higher capex. While low capacity utilisation and poor consumer demand continue to plague domestic investments, an uncertainty regarding the new covid-19 variant adds to the worry stepping into the new year. The looming risk of the third pandemic wave fuelled by the Omicron variant has again forced States to reimpose restrictions which could dampen the sentiments further. Though, the steady pace of vaccinations may provide some comfort. The recent curbs could again make the investment climate an attractive for some time.