India's Capex Landscape: Signs of Revival Amidst Challenges

India experiences a modest Capex recovery in Q2, driven by a central government spending boost despite state-level declines. Corporate Capex sees slight reduction, yet promising signs emerge for a future uptick driven by improved order books in capital goods and infrastructure sectors. Renewable energy remains a key focus area.

In the second quarter, India's capital expenditure (Capex) displayed signs of modest recovery, primarily propelled by a 10.3% year-on-year surge in central government spending, as noted in a CareEdge Ratings report. Although state-level expenditure continued its decline, falling by 3.8% from the previous year, certain states such as Punjab, Assam, Karnataka, Maharashtra, and Rajasthan exhibited resilience, achieving double-digit Capex growth during the first half of the year. This reflects regions of ongoing investment momentum amid a broader slowdown.

Corporately, Capex among a sample of 1,074 non-financial listed companies totaled Rs 9.4 trillion in FY24, a minor drop from the previous year. The report pointed out subdued Capex by both central government and major states on a year-over-year basis, with central Capex contracting by 15.4% and state Capex decreasing by 10.5%.

Rajani Sinha, Chief Economist at CareEdge Ratings, forecasts an upward trend in Capex for both the central government and corporations. Factors contributing to the subdued Capex include election-related restrictions, global uncertainties, slower domestic demand, Chinese oversupply, and higher borrowing costs. Sinha emphasized the potential for public Capex recovery later in the fiscal year, while the private sector shows an encouraging outlook with strong order books in capital goods and infrastructure sectors, suggesting potential expansion in other sectors.

Additionally, Sinha noted favorable conditions for a rise in the private Capex cycle due to deleveraged corporate balance sheets. CareEdge Ratings anticipates a 13% CAGR for Capex in the power generation sector from FY25 to FY28, influenced by both listed and unlisted companies.

The solar and wind energy segments are projected to grow at a CAGR of 10.7% and 16.4%, respectively, highlighting a robust commitment to renewable energy. Analysis of order books in the capital goods sector revealed a sharp 23.6% increase in FY24, in stark contrast to the previous four-year CAGR of just 4.5%.

Investment announcements declined by 29.5% YoY in H1 FY25, with completed projects down 53% YoY. The first quarter's low activity reflected election-related restrictions, but the second quarter saw gradual improvement. However, both investment announcements and completions remain below the half-yearly averages of the past decade. In H1 FY25, the manufacturing sector accounted for 45% of new investment announcements, with the transport (auto and ancillary) and chemicals segments sharing 25% each.

The non-financial services sector led completed projects with a 43% share, predominantly in road transport services, even though new project announcements in this sector were lower, at 18%.

(With inputs from agencies.)