Context

Economists are predicting a potential virtuous capital investments (capex) cycle to kick in globally as we emerge from the pandemic.

Why do analysts think that capital investment cycle is about to start?

• Less leveraged: Corporates are less leveraged today compared to 2008.
• Indian corporates repaid debts of more than Rs 1.5 trillion.
• Fiscal and monetary support: Companies are also more confident of durable fiscal and monetary support.
• Increased savings: Households have large excess savings built during Covid — $1.7 trillion in the US and roughly $300 billion in India as per a UBS report.
• Cash: Lastly, corporates are sitting on a large cash pile – S&P 500 firms’ cash has soared from $1 trillion pre-pandemic to $1.5 trillion now.

Why capex wave is difficult in India?

• Fall in capital formation: India’s fixed capital formation rate has steadily fallen from 36 per cent of GDP in 2008 to 26 per cent in 2020.
• For a set of 718 listed companies for which data is consistently available from 2005, the capex growth rate has decreased from 7 per cent in 2008 to around 2 per cent in 2020.
• Low return on invested capital: The return on invested capital in FY21 is still low at 2-3 per cent compared with 16-18 per cent returns in 2005-08.
• Structural issues: Land acquisition is still tough, changes to labour laws have been slow, and reform uncertainty has resurfaced with the rollback of the agriculture reform laws.
• Discouraging current data: As per CMIE data, the quarter ending in June 2021 saw Rs 2.72 lakh crore worth of new projects announced. This fell to Rs 2.22 lakh crore for the September 2021 quarter.
• This is much below the average of Rs 4 lakh crore a quarter of new project announcements during 2018 and 2019.
• Further, new projects are concentrated in fewer industries (power, and technology) with the top three accounting for 44 per cent of the total of new projects announced.
• Low capacity utilisation: At the same time, capacity utilisation for corporate India is at an all-time low.
• From a peak of 83 per cent in 2010, when capex was running hot, utilisation levels declined to 70 per cent just before the pandemic, and further to 60 per cent in June 2021 as per the RBI’s latest OBICUS data.
• Capex is funded either from fresh debt or equity issues or from accumulated cash. Large firms are repaying debt.

Conclusion

It is too early in the cycle to predict anything with confidence, but we need more evidence to predict a capex cycle.

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