Is India’s capex cycle on revival path?

The Reserve Bank of India expects the capex cycle to finally revive in FY23 based primarily on its analysis of “investment intentions” of the private corporate sector using data on “phasing plans (ex-ante) of their project proposals”. It found “significant” increase in “announcement of new investment projects” in FY22, after a setback in FY21, while admitting that it is still below the pre-pandemic FY21.

The data the RBI has shared shows new proposals sanctioned in FY22 at ₹1.43 lakh crore – up from ₹75,558 crore in FY21. The report says the infrastructure sector continued to attract maximum capex projects, led by power and road and bridges sectors. The conclusion, however, includes other indicators to buttress its expectations of capex revival, which are: improved private corporate balance sheet (historic profits), rising capacity utilisation (CU), robust demand sentiments, higher capital spending and various government policy initiatives.

Closer scrutiny of its data, the data of National Accounts Statistics and other evidence seems to raise doubts though.

Rise in private investment proposals

Tracking the RBI’s reports from 2015, the data shows the FY22 level of new investment proposals (sanctioned by banks and FIs) is less than FY17 to FY20 and also substantially less than FY07 to FY13. Only in three fiscals, FY14 to FY16, the new investment proposals were less than the FY22 level. But the FY22 level is way below the peak levels of FY09 to FY11 (₹4.2 lakh crore, ₹5.56 lakh crore and ₹4.6 lakh crore, respectively).

What this means is that private investment proposals have fallen significantly from the peak level of FY09 to FY11. This exuberance in lending by banks and FIs to private corporates has been blamed by the Central government ministers for leading to high NPAs in later years but it is also indicative of the economy going down, creating its own impetus for business and investment failures (other than wilful defaults, money laundering etc.), which kept the private investment subdued after FY13 (when it was ₹1.9 lakh crore).

The National Account Statistics shows, the GDP growth fell off to 4.5% in FY13 and 4.7% in FY14 in the 2004-05 series. But when the new 2011-12 GDP series was adopted, the growth rate was lifted to 5.5% and 6.4%, respectively.

This overnight lift in the growth rate was later exposed. The NSSO’s 2019 scrutiny of the MCA-21 data (for the services sector units, not manufacturing) used for estimating the 2011-12 GDP series found an unusually high level of flaw (45% services sector units either didn’t exist, didn’t operate or were engaged in unrelated activities). The MCA-21 is a self-populated, unverified database of the Ministry of Corporate Affairs (MCA) which was, until then, secret, unverified or peer reviewed for accuracy. Simultaneously, former CEA Arvind Subramanian used high-frequency data to claim that the 2011-12 GDP series “overestimated” growth by 2.5% between FY12 and FY17.

These two findings reinforced the suspicion that the 2011-12 GDP series artificially lifted the GDP growth to hide the fact that the economy was going down and turned India, instead, into the fastest growing major economy in the world overnight – after the change of government. The growth was further hurt by bad policy decisions like the demonetisation of November 2016 and poorly implemented GST in July 2017. These contributed to business and investment failures and rise in the NPAs as these decisions caused overnight and massive job and business losses.

There is yet another noticeable feature of the RBI data on private investment proposals/intentions.

It shows, growth in overall private investment proposals (money sourced through banks, FIs, ECBs, IPOs, corporate bonds etc.) has been negative for all fiscals from FY10 to FY18, except in FY11. The growth turns positive in FY19 and FY20, contracts in FY21 and then registers a 13.5% growth in FY22. This data is available for the period of FY10-FY22 in the RBI reports since 2015.

This trend may indicate negative private investment sentiments for most part of the past 13 years.

Actual private investments

While the RBI’s data maps investment proposals or intentions of the private corporate sector, the National Accounts Statistics provides actual or “realised” private corporate investment.

Analysis of private sector gross fixed capital formation (GFCF), which reflects the capex of the private corporate sector, shows a progressive fall from a peak of 16.8% of the GDP in FY08 to 9.2% in FY21 (2011-12 series).

Private GFCF has remained below 12% of the GDP for the entire decade of FY12-FY21. The data for FY22 is not yet available.

This is an indication of a long-term declining trend and that even if private corporate investment in FY22 turns out to be high, it may not go back to the 12% plus mark on a consistent basis to make material difference.

This decline may point to structural issues – growth slowing down since FY13, notwithstanding the overestimated growth presented by the 2011-12 GDP series (which, ironically, peaked to 8.3% in FY17, the year of demonetisation, and then went down to 3.7% in the pre-pandemic FY20).

Overall capex growth in the economy

The overall growth in capex in the economy, using the combined GFCF (public and private sectors), shows a fall from the peak of 23.7% in FY05 to 1.6% in the pre-pandemic FY20. In FY21, the growth fell to -10.4% and then rebound to 15.8% in FY22 (2011-12 series and its back series).

The average annual growth in GFCF in the past eight years of FY15 to FY22 is 5.4%. This is markedly lower than the average of 15.2% during the previous 10 years of FY05 to FY14.

This too conforms to the long-term declining trend – confirming what the trends in private investment proposals/intentions and growth in ‘realised’ private investment (private GFCF) show.

There is further confirmation of this slowdown in capex.

An analysis of the Annual Survey of Industries (ASI) shows despite 63.5% in earnings, industries (private and public) invested a mere 2.3% in fixed assets – a six-year low.

While corporates made historic profits during the pandemic fiscals of FY21 and FY22, the economy lost out on corporate tax collection because of the tax cut given in September 2019. Parliament’s “Committee on Estimates” recently released its report stating that the corporate tax cut had caused a straight loss of ₹1.84 lakh crore in corporate tax collection in FY20 and FY21. In FY21, this loss works out to be 21% of the total corporate tax collection (loss of ₹96,339.74 crore collection and actual collection of Rs 4.57,719 crore). Using the same ratio (21%) the tax loss for FY22 (since the parliamentary panel didn’t provide it), works out to ₹1,33,350 crore (total collection ₹6,35,000 in FY22).

Taken together, the total loss of corporate tax due to the 2019 tax cut works out to ₹3.17 lakh crore in the three fiscals since then.

Capacity utilisation and credit growth

As for the RBI’s reliance on rising capacity utilisation (CU) in manufacturing units, it did rise to 75% in the last quarter of FY22 (not available for first quarter of FY23 as yet), it is still less than over 80% last witnessed in FY10 and FY11.

The overall CU in FY22 was 69%. Growth in new order for manufacturing was 28% in the last quarter of FY22 – which is a dramatic fall from 105.7% in the first quarter of FY22. The growth in the second and third quarter was 16.9% and 20.9%, respectively. This is not a definitive or significant indicator of revival in new demand for manufacturing products.

Credit growth to industry (MSMEs and large industries taken together) is another indicator of fresh investment in the economy. This too has fallen from a peak of 20.7% in FY12 to 8.9% in FY22. The 8.9% growth is more because of MSMEs as the large industry recorded a mere 1.3% growth in FY22. The first quarter of FY23 is not very encouraging either. Credit growth to industry (MSMEs and large industry) is 1.8%, but to that of large industry it is negative (-0.55%).

Rise in Centre’s capex

Much has been made of the Centre’s higher capex to anchor high growth in FY23.

The Centre’s capex is up 23% from the budget estimates during the first quarter of FY23, as the Controller General of Accounts’ data shows. The budgeted capex for FY23 is also 24.5% higher than FY22 (RE). This is a good push for growth, except that at 2.9% of the GDP in FY23 (budgeted at ₹258 lakh crore, current prices) – it is a small increment over 2.6% in FY22 and 2.2% in FY21 and also a relatively minor component. In comparison, private sector GFCF (the realised investment mentioned earlier) was 9.2% of the GDP in FY21 and 10.8% in FY20 (no data for FY22).

For the uninitiated, “real” GDP growth in FY23 is projected at 7.2% by the RBI – already down from 8.7% in FY22. The budget document for FY23 projects “nominal” growth (without factoring for inflation) at 11% – already down from 19.5% in FY22. So, the FY23 growth is already going down in the official estimates.

Then comes the heightened global recession threats. The US has already gone through two quarters of negative growth – technically qualifying a recession – and faces further recession threats. The UK and Eurozone too are facing recession threats. Global interest rates have gone up significantly and are expected to rise further. Besides, India is witnessing a significant fall in exports, an elevated inflation (6.7% for the entire FY23), elevated global commodity and crude prices and also further rise in interest rates. All of this not only make the RBI and budgetary estimates of growth in FY23 highly exaggerated, the adverse external and internal conditions are likely to impact capex in India (for more read Fortune India’s “Amidst global recession threat, India finds hope!”

To sum up then, the RBI’s hope for revival of the capex cycle in FY23 seems premature.