Will government capex plans crowd in private capex?

Capex cycle stocks, generally referred to stocks in sectors like capital goods, construction, cement, metals, and banking, that are at the core of infrastructure development have already experienced a certain boom. In the last one year, the Nifty Infra index, a representation of 30 infra companies, has outperformed Nifty 50 by rising 39.89% against a 28.68% increase in the broader index.

The corporate India, on the other hand, witnesses an upsurge in profit and cash flow amidst the uncertain market conditions in the last two years, has been deleveraging its balance sheet instead of spending on investments. The credit quality of companies has also enhanced, evident from the fact that credit ratio of CRISIL Ratings, that captures rating upgrades to rating downgrades, has increased 2.96 times in the first half of the current fiscal, compared with 0.54 times a year ago. A leaner balance sheet and a healthy credit rating backed by an accommodative monetary policy of RBI and a public sector capex push in the budget laying the foundation for India@100, the condition seems ripe for improved traction in India’s private sector and emergence of a new capex cycle as suggested by multiple experts. 

The optimism, however, is also accompanied by various counter arguments, which majorly include the contracted revenue expenditure in the budget, potentially impacting the already dwindling consumption amidst unequal recovery from the pandemic reflected through low-capacity utilization, appreciable unemployment, and lower household income generation. Thus, the success of the strategy of the budget to stimulate demand by increasing capex rather than consumption expenditure, will be decided on how quickly it leverages the strength of the economy to deliver the intended inclusive growth, even out the recovery, increase job creation and prop up home consumption.

Speedy and efficient implementation is one such important factor. Towards this, the role of choosing projects, sequencing, and swift allocation of funds, ensuring minimal cost and time overruns will be very crucial.  The states with a rising share of capex and playing an important role in the execution of projects may have to play a complementary role. The immediate objective would be to kick-start the multiyear capex cycle in India as intended in the budget. Corporate announcements for new projects, industrial sector order inflows, improving quarterly commentary etc. may be good indicators to guide progress of the cycle.

The corporate India may also have to play a crucial role by mobilizing resources and bringing in technology required to deliver quality infrastructure projects. They may also have to ensure that their productivity and costs are competitive even under the various protection provided in the budget to deepen the import substitution theme in the country.

(This article is authored by Adil Zaidi, EY India Partner and Economic Development Advisory Leader.)