It has been the story of “almost there, yet never there” kind for the capex revival. Sample this, “The upturn in the current investment cycle, which began in 2016-17, is estimated to last up to 2022-23 when the investment rate is estimated to increase up to 33 per cent from the current level of 31.4 per cent.”
This was from none other than RBI, when it quoted its study in the middle of 2018. That hope was belied by the sharp slump in 2019 that got triggered by the most ill-conceived and regressive Budget then.
Conversations on capex revival are once again back on the center stage with utilizations going up in much of the core industries.
Will 2021 be any different? Let us find out.
First, why is it that there is a sudden rush to call out the capex turn? What has changed now? One reason could be that in India’s capex cycle, never before, we have had a combination of right government policies (PLI), concessional corporate tax, commodity super cycle, China pushback (China-plus-one and de-risking Chinese imports), high industry utilization and low interest rates coming together to conspire a big turn in the investment demand.
Also, China’s stringent environmental controls couldn’t have come at a better time, indirectly boosting domestic manufacturing, especially in chemicals, metals and steel.
While some of these factors came into play in isolation in the earlier years, like low interest rates and high utilisation, it is for the first time that all of these are coming together, lending credibility to the optimism. We did hit high utilisation numbers (above 70 per cent level which normally triggers the capex turn) at least on two occasions in the last few years, which later fizzled out because of the subsequent slump in economic activities.
But this time, a powerful combination of various factors could end up pumping the spirits of the corporate chieftains to unlock their investment plans.
But still, isn’t all of this in the realm of speculation?
To back this up, one needs to look at what corporates are actually doing on the ground. This is where, one gets to see evidence that this time, it could be really different. Sample the expansion plans announced recently by leading companies in the core sector:
- An outlay of over $15 billion by top steel companies
- Expansion projects worth $5 billion by leading cement companies
- Over $15 billion commitments in new projects by oil & gas companies (20 per cent of this has already been spent in the first quarter itself reflecting the urgency in expansion)
- $10 billion investments in the power and coal
- $5 billion outlay in the non-ferrous sector
It doesn’t stop here. If one adds the activities in the renewables, ports, gas pipelines and chemicals, outlays this time look promising and they can materially turn the cycle. More so, if the additional support comes from the turn in the credit cycle. With NPA clean-up nearing its end and with rising capital buffer showing on balance sheets, Indian banks are getting ready for the new credit cycle.
Further, asset monetisation through InvITs (Infrastructure Investment Trusts) by PSUs and other entities will go a long way in releasing funds for these entities to start fresh capex cycle.
After power, the country’s oil PSUs would now float an InvIT as part of the asset monetisation exercise and raise funds for new investments. For the government, building gas pipeline infrastructure through this route is a key priority.
The reason why we are keen to decipher the dynamics in capex cycle is because of the significance it has on the overall economic growth. A solid turn in the investment cycle can feed in to consumption demand, which can in turn fuel further investment in a self-fulfilling fashion to set off a virtuous cycle for the economy, especially when the cumulative impact of past structural reforms (IBC, GST, RERA etc.) are about to play positive for the macros. Such is the power of the capex cycle!
Only time will tell us whether we are on the cusp of another boom in the capex cycle. With global companies looking at India as a serious option to derisk their supply chains, time couldn’t be more right for the cycle to turn, especially when China is ready to extend unsolicited favours by tightening its environmental norms and resorting to export controls on steel, metals etc.
Interesting time to watch out for!
(ArunaGiri N is Founder CEO & Fund Manager at TrustLine Holdings. Views are his own)