Editorial. India Inc’s excuses for slow pace of capex wear thin

Industry associations have been coming up with their usual wish-lists ahead of the upcoming Budget for 2024-25. Most suggestions are on expected lines, with plugs for rural infrastructure and consumption boost, job creation, PSU privatisation, GST rationalisation, anti-dumping action and so on. However, it is surprising to see some demands for the Centre to further ratchet up its capital spending. One demand, for instance, has been for the Centre to raise its capital outlays by 25 per cent in the FY25 budget compared to the 17 per cent increase in the interim Budget.

The expectation that the Central government will continue to do the heavy lifting on fixed capital investments, while the private sector waits for utopian conditions, seems unreasonable. With the government handing out significant tax breaks to private corporations just before Covid, India Inc exited the pandemic in better shape than households. National Accounts data show that, with the Centre tightening its belt on revenue spending and shifting its expenditure mix in favour of capital spending, government-driven Gross Fixed Capital Formation (GFCF) shot up by 64 per cent between FY19 and FY23, while private sector GFCF rose only 52 per cent. The private sector’s share in capital formation has fallen in the last five years while the government’s has climbed. It is about time India Inc picks up the baton on capital investments, while the government focuses on fiscal consolidation.

The usual excuses that industry captains trot out for dragging their feet on capex are wearing thin. Trends in the sales of FMCGs, white goods, e-commerce, two-wheelers and cars, air traffic, hotel bookings et al in recent quarters, belie the claim that domestic demand remains uncertain. Besides the optimism exuded by consumers in the RBI’s forward-looking surveys, bank retail credit offtake has been growing at over 20 per cent. In recent months, real GDP numbers have overshot estimates while Purchasing Managers Indices (PMIs) for both manufacturing and services have stayed in expansion mode. Industrial capacity utilisation nudging 74.7 per cent in the RBI’s latest OBICUS survey (Q3 FY24) also offers little hint of factories idling or struggling for new orders. Helped by tax cuts and benign commodity prices, India Inc has seen a manifold expansion in its profitability and cash flows in the last five years, with net-debt-to-EBIDTA halving in this period. As a result, rising interest rates have not made much of a dent in corporate debt servicing ability.

It is not clear what cues India Inc is waiting for, to embark on capital expansion. The time is ripe for it to get going, while allowing the Centre to prioritise fiscal consolidation over a continued capex boost. The government needs to scale back its market borrowings to create room for the private sector to fund its capex, and for the Monetary Policy Committee to consider easing up on rates.