Private capex is creeping up

Early signs of rising private capital expenditure reflect the crowding-in effect of GoI‘s investment push rather than consumption-driven capacity expansion. The biggest contributors to private investment are the energy, metals, minerals and telecom industries, in line with physical and digital infrastructure build-up. This is an expected knock-on effect of government capex. The theme of government expenditure over the past few years has been capital-intensive to deliver a bigger multiplier on economic output. The spillover into consumer demand, a necessary condition for broad-based private investment revival, is yet to occur. Government capex will have to taper, and policymakers will be hoping for a recovery in consumption before that eventuality. But consumption demand is still weak on account of persistent inflation and languishing real wages.

This is also showing up in slowing company earnings, although they look healthy against the previous year’s performance. The current results season is being led by banks pushing credit to consumers and energy companies gaining from a downturn in the commodity cycle. Consumer durables are benefiting from credit- led purchases, but non-durables continue to wobble on weak rural demand. Weakening external consumption is being transmitted through sombre IT sector numbers, the weakest sectoral performance in the April-June quarter. Moderate input costs and low leverage are helping companies preserve margins overall. But conditions are not yet ready for capacity expansion across sectors.

GoI’s incentives for domestic manufacturing emphasise this. Offtake has been patchy for PLIs among the industries identified. Partly because the scheme is designed to promote exports, and some commodities are affected by the global trade slowdown. Domestic conditions have also turned adverse for some industries like steel and cement with construction affected by excess monsoon rainfall. A full-blown capex revival will have to await domestic and external conditions turning less inimical.