India’s Capex Story Gives A Mixed Picture

Channelling spending towards new investments, project expansions and other capital expenditures fosters higher economic activity. It also augments economic capacities promoting opportunities for employment and supporting demand. A sustained focus on investment has strong multiplier effects as it puts the economy on a high growth trajectory.

With consumption showing a subdued performance, investment has become even more critical for supporting India’s growth trajectory. India’s gross fixed capital formation (GFCF) increased to 30.8% of GDP in FY24, compared to an average of 28.9% between FY15-19 (pre-pandemic period). 

The government’s strong capex push, as well as household investment in real estate (dwellings, other buildings and services) has supported the improvement in GFCF. However, the scenario on the private capex front remains muted with a durable recovery yet to be seen, said CareEdge Ratings in a report.

The report presents an evaluation of the investment scenario in the Indian economy. The following sections provide an analysis of public and private capex and sources of financing. On the corporate capex front, the aggregate capex of a sample set of companies (1,074 non-financial listed companies) was seen at Rs 9.4 trillion in FY24, marginally lower than the previous year. 

The central government and aggregate state government capex (20 major states) contracted by 15.4 per cent and 10.5 per cent (YoY), respectively, in the first half of FY25. 

Aggregate capex by major CPSEs contracted by 10.8 per cent (YoY) in H1, amounting to Rs 3.4 trillion, which is approximately 43.6 per cent of the annual target. Furthermore, investment announcements and completions both by the public and private sectors also point towards a sluggish half-yearly performance according to CMIE data. 

Election-related restrictions in Q1 FY25 weighed upon the public capex in the first half of the current fiscal. Additionally, subdued domestic demand, geopolitical tensions, oversupply from China and higher borrowing costs have also posed headwinds for the upturn in investment scenario.

To analyse the future capex growth of the economy, the report has analysed the order books of the infrastructure and capital goods sectors. The infrastructure sector, being the backbone of the economy, and the capital goods sector, which produces essential tools and machinery for goods and services production are key leading indicators of future capital expenditure by both the public and private sectors. 

The increasing order book trend of the capital goods sector and the recovering trend of the infrastructure sector suggest optimism about further capital spending by businesses in other sectors as well, creating a positive feedback loop.

Public & CPSE Capex Remains Subdued In H1 FY25 
In the past few years, public capital expenditure has shown strong growth, primarily driven by the central government’s capital expenditure. According to budget estimates, the central allocation for capex has more than doubled, increasing from 1.6 per cent of GDP in FY19 to a budgeted 3.4 per cent of GDP in FY25. 

Additionally, state capex is budgeted to experience a modest increase to 2.6 per cent of GDP in FY25, surpassing the pre-pandemic level of 2.2 per cent of GDP in FY19. It is of utmost importance to closely monitor the actual capital expenditure by states, as historically, states have often faced challenges in fully deploying their budgeted capex allocations. 

The top 20 major states experienced an aggregate shortfall of approximately 18% compared to their budgeted capex amounts in FY24. Apart from Telangana, Bihar, Madhya Pradesh and Himachal Pradesh, all major states have missed their budgeted capex target in FY24. This underscores the importance of monitoring state capex to identify and address potential deployment challenges, the report added.

In the first quarter of FY25, public capital expenditure slowed due to the restrictions imposed during the general elections. The Central capex contracted by 35 per cent YoY in Q1 to Rs 1.8 trillion, while the state capex decreased by 21 per cent YoY to Rs 0.8 trillion. A marginal recovery in the public capex expenditure was witnessed in Q2, led by central capex, which grew by 10.3 per cent YoY in the second quarter. 

However, state capex continued to remain in the contractionary zone, falling by 3.8 per cent YoY in Q2. Some states like Punjab, Assam, Karnataka, Maharashtra, and Rajasthan, witnessed double-digit growth in capex in H1. Central and aggregate state capex contracted by 15.4 per cent and 10.5 per cent (YoY), respectively, in H1. With this, the centre has achieved 37 per cent of its budgeted capex target in H1, while 20 major states, at an aggregate level, have achieved only 28 per cent of their budgeted target. 

It is crucial to monitor the trajectory of the public capex going forward. Any further slowdown in subsequent quarters could result in a shortfall relative to budget estimates. Hence, the possibility of a downward revision in the capex target remains.

To bolster capital expenditure by states, the centre has raised the allocation for the 50-year interest-free loans in the Union budget for FY25 to Rs 1.5 trillion, compared to Rs 1.3 trillion announced in the interim budget. Of this, Rs 550 billion is an unconditional loan, while the remaining Rs 950 billion is tied to various conditions such as industrial growth, land reforms, and capex growth by states. 

However, it is important to monitor the utilisation of this loan by state governments in FY25. In the previous fiscal year, state governments had only utilised Rs 1.1 trillion of the budgeted interest-free loans of Rs 1.3 trillion.

In the first quarter of FY25, capital expenditures by major Central Public Sector Enterprises (CPSEs) (with capex targets of Rs 1 billion and above) declined by 38.4 per cent YoY, totalling Rs 1.46 trillion. However, there was a recovery in Q2, with capex of Rs 1.92 trillion. 

Overall, capex by major CPSEs contracted by 10.8 per cent in the first half of FY25, amounting to Rs 3.4 trillion, which is approximately 43.6 per cent of the annual target. "There is a need for CPSE capex to pick up in H2 FY25 to meet the full year target," according to the report.

The government has set an aggregate CPSE capex target of Rs 7.7 trillion for FY25, reflecting a 4.9 per cent increase compared to the previous year's target of Rs 7.4 trillion.