Indian equities attracted good foreign portfolio inflows in 2023 at over $20 billion, but capex by companies is not keeping pace.
Private capital expenditure has been sluggish over the last ten years and disruptions such as the Covid pandemic, high inflation rates, supply chain problems have only contributed to an uncertain macro environment.
“Despite all the efforts on the part of the government to promote manufacturing and private capex, we haven’t seen that sort of a positive response yet given that the corporates are also dealing with a lot of uncertainties globally,” Saion Mukherjee, Managing Director & Head of Equity Research, India, Nomura, told businessline in an interaction.
Inflow momentum into India should continue this year as well, especially with interest rates expected to go down and private capex can rise if there is global and domestic stability but in the longer term, says Mukherjee.
Edited excerpts from the interview.
Last year was very good for the Indian markets in terms of foreign inflows. Do you see that sustaining in the current year as well?
I think the foreign flows can sustain, particularly due to the assumptions that we have about a fall in interest rates. We are expecting the US Fed to start cutting rates some time middle of this year and probably more aggressively towards the end of the year. India ‘s macro and micro stories are looking quite good. Flows into India have been good compared to other economies, but their holding in Indian equities have come down because there has been a much bigger participation from domestic funds. Unless the global macro surprises on the negative side - say if you have acceleration in inflation, which would mean rates probably not coming off or in the worst case even going higher, or you have a risk of a deep recession in the US -- those events can obviously lead to flight to safety and away from emerging markets. Those possibilities do exist, but that’s not the base case. Assuming that we get a softish landing with rates coming down, I think FPI flows should continue to remain positive for India in 2024.
This is an election year. Will that have an impact do you think?
We felt in 2023, even before the run up in markets that happened towards the end of the year, foreign investors had a view that India was relatively more expensive than other emerging markets. Given that we are heading into an election year - most believe that it’s an event risk - and they carried a view that it’s better to wait out for that event and then probably engage because anyway the markets are not that cheap. That view underwent a change in the last few months., After the assembly election results, most analysts have a view that the current government would be able to come back to power and therefore there will be policy continuity. So I think the election at this point, I don’t think is a worry for investors because people are assuming that the election outcome would be favorable. That’s the base assumption. I think we will see a rally, or we are already seeing that rally before the elections and you know, hoping for the desired outcome post-election.
At the beginning of 2023 we were talking about stimulating private expenditure and consumption. One year later nothing seems to have changed and private investment by companies has still not picked up.
This is very much true. If you remember in September 2019 the government reduced taxes on corporates and even for new manufacturing units, it was brought down to a very reasonable level of around 15 per cent plus surcharges. Then you have the PLI, which was rolled out, and other incentives, but I guess some of these things take time and more importantly, during Covid years nothing was happening in any case and uncertainty levels were high. Unfortunately, as we speak, the whole global system has been disrupted, supply chains have been disrupted and on top of it, if you add the geopolitics, the uncertainty levels are very high. So despite all the efforts on the part of the government to promote manufacturing and private capex, we haven’t seen that sort of a positive response yet. Though the risk of recession today is lower but there is a risk. For instance, in the US the interest rates are higher than what they had seen in decades. China is also going through a significant downcycle with a lot of political interventions. Given all this uncertainty, it is not a very conducive environment for private capex. That is the reason why we are still struggling.
The fact is that private capex has been on a downturn for many years now. If you look at the last 10 years - except for the last couple of years where you saw some level of uptick with many companies investing in digitization - overall the capex has consistently been very muted. We looked at BSE 500 companies, and the total capex minus depreciation, - that’s how we define net investment - has consistently come off, you know, over the last 10 years. My sense is once we get clarity or stability globally and that starts to have a positive impact on manufacturing, I think you will see a much sharper rise in corporate capex.
The manufacturing to capital expenditure ratio, is towards historical highs. If manufacturing goes higher, the capital expenditure has to go high even faster. So if you ask me whether we will see a revival in 2024 it becomes a bit difficult because I don’t know if we can get clarity or stability in the short term, but if you take a slightly longer term say, 3 year view, I think at some point in that time you will see a very strong revival in private capex.
The recent quarterly performance updates by consumer and automobile companies show a persistence weakness.
If you look at our overall growth numbers, which the government releases, it is not broad based. It’s being driven by government expenditure, which is a big contributor and support. But the private consumption and private capex are lagging. In consumption there have been times when the high end consumption has done much better than the mass consumption. If you look at companies, the staple for instance, who have a large presence in rural India, they are reporting very muted volume growth - low single digit volume growth. The fact is that rural Inflation has been very high. And the rural real income has actually been in the negative territory for most of the last 3-4 years. So with inflation coming down, we hope that the mass market consumption will stabilize and pick up. The updates that we are seeing, especially from the consumer companies, I would say is not very encouraging . If you look at four-wheeler companies, they have gone through a phase of strong growth, and it’s possible that going into the next few quarters you will see a slowdown there because if there is pent up demand, demand on account of excess savings during the pandemic, that will slow. The mass consumption may not pick up at the same time.
Just from a growth perspective we do expect private capex to pick up, we do expect mass consumption to pick up again, but whether it will happen at the end of this fiscal year, this calendar year or will take longer - that is the question. So there are concerns that we have from a very short-term perspective on the economy and growth and the current numbers that we are getting, I would say is definitely not encouraging enough at this point.