As demand resurges and growth prospects brighten, the onus now falls on the industry to ramp up investments. India’s private sector can no longer rely on the government to shoulder the burden of capital expenditure indefinitely.
Industry associations, predictably, have begun circulating their standard wish-lists in anticipation of the 2024-25 Budget. These proposals include calls for bolstering rural infrastructure, stimulating consumption, creating jobs, privatizing PSUs, rationalizing GST, and enforcing anti-dumping measures. Yet, it is surprising to note the persistent demands for the Centre to further increase its capital spending. One such demand calls for a 25% increase in capital outlays for the FY25 budget, surpassing the 17% hike seen in the interim Budget.
The expectation that the Central government will perpetually lead in fixed capital investments while the private sector waits for ideal conditions is untenable. With significant tax concessions granted to private corporations pre-Covid, India Inc emerged from the pandemic in a stronger position than households. National Accounts data reveal that as the Centre tightened its belt on revenue spending and shifted towards capital expenditure, government-driven Gross Fixed Capital Formation (GFCF) surged by 64% from FY19 to FY23, compared to a 52% increase in private sector GFCF. Over the past five years, the private sector’s share in capital formation has declined while the government’s has risen. It is high time for India Inc to take the lead in capital investments, allowing the government to focus on fiscal consolidation.
The typical justifications provided by industry leaders for delaying capital expenditure are becoming less convincing. Recent trends in sales of FMCGs, white goods, e-commerce, two-wheelers and cars, air traffic, and hotel bookings contradict the assertion of uncertain domestic demand. Additionally, consumer optimism reflected in the RBI’s forward-looking surveys, alongside a more than 20% growth in bank retail credit offtake, indicate robust demand. In recent months, real GDP figures have surpassed estimates, and Purchasing Managers Indices (PMIs) for both manufacturing and services have remained in expansion. The RBI’s latest OBICUS survey (Q3 FY24) shows industrial capacity utilization at 74.7%, dispelling any notion of idle factories or a dearth of orders. Furthermore, aided by tax cuts and stable commodity prices, India Inc has witnessed substantial growth in profitability and cash flows over the past five years, with net-debt-to-EBIDTA ratios halving during this period. Consequently, rising interest rates have had minimal impact on corporate debt servicing capabilities.
It remains unclear what signals India Inc is awaiting to initiate capital expansion. The current environment is ideal for the private sector to commence its capital investments, enabling the Centre to prioritize fiscal consolidation over sustained capital expenditure boosts. The government must reduce its market borrowings to free up space for the private sector to finance its capital expenditure and allow the Monetary Policy Committee to consider easing interest rates.