DURING AN EVENT in New Delhi on September 13, finance minister Nirmala Sitharaman took a leaf out of Ramayana to understand the reasons behind subdued private sector investments despite steep corporate tax cut, sharp rise in public capital expenditure, simplification of GST (goods and services tax) and Atma Nirbhar Bharat Scheme. She referred to the episode where Lord Hanuman stares at the sea in Rameshwaram and doubts his ability to cross it and reach Lanka. It’s only after he is reminded of his indomitable strength that he is able to take off on his mission to find Maa Sita.

Likening India Inc.’s inhibition to invest to Lord Hanuman’s doubts before taking the leap of faith, Sitharaman said, “Is it, like Hanuman, you do not believe in your capacity, in your own strength, and there has got to be somebody standing next and say, ‘hey, you are Hanuman, do it’. And who is that person to tell Hanuman? That certainly cannot be the government.” Sitharaman sought to know what industry was hesitant about. “I want to hear what is stopping you?” she said, referring to the series of steps taken by Central government to encourage companies to invest.

The private sector’s lack of enthusiasm for investing in spite of rising profitability, helped by corporate tax cut from 30% to 22% and substantial deleveraging over the years, has been the key concern of top Raisina Hill occupants given the narrowing scope for increasing public capital expenditure amid rising debt to GDP ratio (87.6% in FY21) and subdued exports in the wake of Russia-Ukraine war and global price rise/monetary tightening. According to Reserve Bank of India (RBI), private sector saw “healthy growth” in FY22, with sales, production and net profit rising significantly in comparison to FY21, when companies in a large number of sectors had reported contraction on most parameters. RBI data says 1,865 listed manufacturing companies reported 36.7% sales growth in FY22 compared with 2.8% contraction in FY21. One may argue that FY22 growth came on low base of pandemic-hit FY21, but even in FY20, sales of manufacturing companies had dipped by 7.4% against 14.8% growth the previous year. This means India Inc. has got a huge fillip in FY22 after a gap of four financial years. Profitability has also got a leg-up. “Despite input cost pressures, net profit of manufacturing companies zoomed 50.2% in FY22, as against 11% decline in FY20 due to low demand,” says the RBI report. The debt-to-equity ratio of listed firms fell to a six-year low of 0.59 in FY21 compared with 0.73 in FY20.

Still, companies have been avoiding big investment decisions.

Tepid Private Investment

According to RBI’s August bulletin, funds raised for capital expenditure through banks, financial institutions, external commercial borrowings, foreign currency convertible bonds and initial public offers dipped 28% from ₹2,71,374 crore in FY20 to ₹1,94,548 crore in FY22. CMIE data says capital expenditure on new projects halved from ₹8.18 lakh crore in January-March FY22 to ₹4.28 lakh crore in April-June FY23. According to World Bank, private sector gross fixed capital formation in GDP dipped from 31% in 2011 to 22% in 2020. Total gross fixed capital formation came down from 34.3% of GDP in FY12 to 32.4% in FY22.

Image : Photograph by Narendra Bisht

So, what’s holding up the India Inc.? “The response of the private sector must be seen in the context of recession looming large in major economies of the world. In an international economic order where supply chains are global and markets for goods and services integrated, private investors generally tend to be cautious (in such a scenario),” says Assocham secretary general Deepak Sood.

Experts say private sector investments have been subdued since the 2008 global financial crisis and have failed to take off due to policy paralysis and fiscal mismanagement under UPA government, and twin balance sheet issue (high corporate debt plus bank NPAs), demonetisation and poorly designed GST during the NDA regime, followed by the mother of all crises— Covid-19. “Private capital investment has not picked up because of multiple shocks the economy has faced since the 2008 global financial crisis. Increase in fiscal deficit crowded out private investment through liquidity and interest rate channels. Then, demonetisation, GST and economic slowdown happened,” N.R. Bhanumurthy, vice chancellor, Dr B.R. Ambedkar School of Economics, tells Fortune India.

Sunil Sinha, director, public finance, India Ratings, points at bank non-performing assets (NPAs) and twin balance sheet problem. “After the global financial crisis, infrastructure companies got overleveraged. Manufacturing players were hoping for revival of demand but their expectations were not met. They were investing but mostly in maintenance capex and not greenfield capex,” he says, adding that when the new government took charge in 2014, sentiment turned positive but note ban and GST hit consumption. This put the onus of keeping the economy running on government.

Image : Photograph by Narendra Bisht

Government Takes Charge

All this while, government has kept capital formation rolling. Central government has spent over ₹9 lakh crore to build capital assets in past year and a half. Finance ministry data shows ₹3,42,889 crore capital expenditure in first half of current financial year, up 50% from ₹2,29,351 crore in same period of FY22. “With government adopting a public investment strategy, the quality of expenditure is set to improve. It will have a crowding-in impact on private investments. So, this year, we expect a better private investment rate,” says Bhanumurthy. Sinha says corporate sector was “gung ho” about investing due to improvement in bank NPAs and corporate balance sheets and muted third wave of Covid-19 but held back due to global factors. “They were thinking about expansion in view of receding Covid-19, demand revival and record exports in FY22. The Russia-Ukraine war destabilised everything as crude oil and commodity prices shot through the roof and exports came under cloud. Even though everything is in place, the corporate sector feels this may not be the right time to invest. Most have gone into a wait and watch mode unless there’s clear demand visibility,” Sinha says, adding this applies mainly to traditional manufacturing industries as sunrise sectors will follow a different trajectory and continue to expand.

Sunrise Sectors: A New Promise

Sinha says the principle of demand does not apply to disruptive sectors such as electric vehicle (EV), cell manufacturing, semiconductor, e-commerce and green energy where supply will automatically trigger demand. Take the two frontrunners in 5G rollout, Reliance Jio and Bharti Airtel. At RIL’s 45th annual general meeting on August 29, CMD Mukesh Ambani outlined plans to invest ₹2 lakh crore for rapid rollout of 5G. Last year, RIL had announced ₹75,000 crore investment in new energy business, a major sunrise sector. Bharti Airtel has announced plans to invest ₹1.17 lakh crore over four years. It reported one million unique 5G users in less than 30 days of commercial launch. Bharti Airtel has launched 5G in eight cities — Delhi, Mumbai, Chennai, Bengaluru, Hyderabad, Siliguri, Nagpur and Varanasi. The Adani Group has announced plans to invest over $100 billion in next 10 years, predominantly in energy transition (up to 70% allocation).

Suzuki Motor Corporation, Vedanta–Foxconn and Tata Group have also announced big investments in new industries. Suzuki Motor Corporation announced ₹30,000 crore investment in an electric cell plant in Gujarat and a vehicle plant in Haryana earlier this year, while Vedanta–Foxconn will invest ₹1.54 lakh crore to set up a semiconductor facility in Gujarat. Tata Group is planning $90 billion investment (₹7.29 lakh crore) in industries like mobile component, semiconductor, EV and e-commerce by 2027.

Mega investments in EV space will have a ripple impact on auto component sector in the long run. ICRA says large auto component manufacturers are adopting a “cautiously optimistic” approach towards investing in this financial year. ICRA Research expects auto component suppliers to gradually increase investment outlay in FY23 and fund it largely through internal accruals. “Incremental investments will primarily go towards capability development—product additions, product development for committed platforms and development of advanced technology and EV components, unlike past investments towards capacity expansion. The recently-announced PLI Scheme will contribute to accelerating capex over the medium term, besides investments by new entrants in the EV segment,” says Vinutaa S., vice president and sector head (corporate ratings), ICRA Ltd.

Sinha, meanwhile, points out that among traditional manufacturing sectors, steel and cement are expected to invest owing to government push for infrastructure creation. For FY23, Tata Steel has lined up ₹12,000 crore investments — ₹8,500 crore for India and rest for Europe. Till early November, it had spent less than half. Another big steel player, JSW Steel, which planned to spend around ₹48,000 crore to expand steel capacity by 50% to 36.5 million tonnes by 2024, has turned cautious due to soaring raw material prices, shrinking global demand and trade curbs by U.S. and Europe. “We had plans for capex worth ₹20,000 crore capex for current fiscal, but after Q1 results in July 2022, reduced it to ₹15,000 crore,” says Seshagiri Rao, joint managing director and group CFO, JSW Steel. “The current global steel market is highly distorted as Europe has fixed a quota for steel imports while U.S. has imposed high anti-dumping duties on exporters like Indian steel companies,” says Rao.

Crowding in of Private Investment

That said, on the domestic front, government capital expenditure push is helping at least two segments, railways and highways, gallop ahead, creating a massive demand from private sector. At ₹1,37,100 crore, railway ministry utilised 65% budgetary allocation in first half of current financial year compared with 43% in same period of previous financial year. Its plan to start 75 new Vande Bharat express trains by August 15 next year and massive wagon procurement targets will create opportunities for private companies. The ministry has till date floated tenders for procurement of 400 Vande Bharat trains in three tranches. The trains will have top speed of 200 kms per hour. The ministry has also rolled out tenders worth ₹30,000 crore for procurement of 90,000 wagons in next four years. A total of 16 companies have evinced interest in supplying the wagons.

Ambitious urban transport projects are also expected to give a lot of business to private companies. For instance, National Capital Region Transport Corporation (NCRTC) is building a rapid regional transit system connecting Delhi to Meerut at a cost of ₹30,000 crore. It is likely to soon take up two more corridors — Delhi-Alwar and Delhi-Panipat. The capital cost of all three corridors is expected to be about ₹1,00,000 crore. Alstom is supplying rolling stock for the projects. “Alstom has been awarded the contract for delivering 40 trainsets, including 10 three-car trainsets for Meerut Metro, bundled with rolling stock maintenance for 15 years. Two trainsets have already arrived and a few more will arrive before operations of RRTS on the priority section begin. Alstom will deliver 40 trainsets before the entire Delhi-Ghaziabad-Meerut corridor becomes operational in 2025,” says Vinay Kumar Singh, managing director, NCRTC. The first stretch of 17 kms between Sahibabad and Duhai will open in March next year. The transport ministry, meanwhile, has spent ₹1,87,744 crore to build capital assets in first six months of FY23 compared with ₹1,21,893 crore in same period of previous financial year.

Assocham’s Sood says buoyed by public sector investments, the private sector would steadily commit to fresh investments. Trends indicate sunrise sectors along with government capital expenditure will keep the investment cycle moving till traditional manufacturing and industry join the bandwagon when capacity utilisation rises to 80% from 75% at present. The only question is whether monetary tightening and high interest rates will act as a dampener. Experts, though, say that these concerns may recede once demand is back. With the kind of challenges the economy faced in last ten years, private sector would not have invested without demand even in a low-interest regime as even servicing low-cost debt was tough when EBITDA was under pressure. However, once demand is back, the focus will turn towards positive spread between cost of capital and internal rate of return even if interest rates are high. In effect, if demand comes back, private investment will become more broad-based.

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