Will the Real Capex Revival Please Stand Up?

Apr 4, 2018

Sarvajeet Bodas, Research analyst

This is a short conversation between the optimist and the pessimist in me. It happened sometime in 2017.

Optimist: It's happening. We're almost there. It (the much awaited capex revival) is just around the corner. Sure, there were some speed bumps like Demonetisation and GST. But we're past all that now.

Pessimist: But why the speed bumps?

Optimist: They were necessary for clean, long-term growth.

Pessimist: Ohh...really?

Optimist: Yes, absolutely. Because in the long run, these so-called speed bumps will bring structural changes to the economy.

Pessimist: I thought in the long run we are dead.

Back to present-day reality...

I know, it's a cliche, but I couldn't help but wonder about the real economic recovery.

The real capital spending by India's companies...

The last capex cycle peaked in 2010-11. Then we had prolonged slowdown and policy paralysis. Also, there was uncertainty due to a spate of scams.

And then...

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The new government arrived.

Everyone was positive about the recovery.

Unexpected help came from falling crude oil prices. They helped in improving India's balance sheet. Not to mention, the monsoons were good too.

It looked like finally everything falling into place. In fact, the GDP growth was 7.5% in the second quarter of FY16.

But then...

The big speed bump arrived: Demonetisation.

For some time, the economy went through a cardiac arrest. Demonetisation brought a massive disruption in day to day life. The pain was spread across the country for several months.

For the country's informal sector, estimated to account for 45% of India's GDP, the impact was severe.

Then came GST.

The immediate implementation of GST, after demonetisation, added to the pain.

Nevertheless, everything was set.

Demonetisation...check. GST...check.

The optimist said, 'Yes, everything is done. Now we are ready'.

Things started to look good. Big companies were announcing their capex plans.

There was some good news from the steel sector as it saw good recovery. Mind you, the steel sector's downfall was an important reason for the swelling of NPAs in PSU banks.

Reforms like insolvency and bankruptcy code (IBC) paved way for strong companies to actively bid for stressed assets.

The optimist said, 'Wow. This will finally help banks to recover some money. They can use this for lending to strong companies'.

But then...

The PNB scam happened.

As Warren Buffett says... 'There's never just one cockroach in the kitchen'.

An army of cockroaches arrived. Frauds at IDBI Bank, Union Bank of India, and other banks came to the fore.

Fingers are pointing at the heads of ICICI Bank and Axis Bank as well.

'Seriously, what's happening?' the realist in me asked.

To get more clarity and perspective, I met the managing director of a leading credit rating agency last week.

This is what he had to say about the capex revival...

  • The Nirav Modi episode has delayed capex revival by 6-12 months further. Even that depends on a good monsoon. Note that we had two consecutive good monsoons. So, this increases the probability of having below normal monsoons in 2018. Not to mention, 2019 is an election year. This brings a lot of uncertainty.

Well, that's a real picture.

The pessimistic reminded me, 'Don't forget, our unexpected friend. Crude oil has started to turn hostile again. And an international trade war has come out of nowhere'.

Now, these are some trigger points which could lead to a market correction. Tanushree believes, the market could fall by 30% from the recent peak. We've already seen the market fall 10%.

Considering the current state of events, the realist in me now says, 'The capex recovery is like a mirage in a desert. You go after it...and it gets further and further away. Will the real capex revival please stand up?'

What do you think?

What will be the key trigger that will bring back capital spending? Drop us a line. Leave a comment. We would love to hear from you.

I'll be back next week with my take.

Chart of the Day

Talking about GST, the collections in February declined marginally to Rs 851.7 billion.

The GST collections in January stood at Rs 863.1 billion, while in December it was Rs 889.2 billion. This implies two consecutive monthly declines.

Marginal Decline in GST Collections

The low collections can also be attributed to sluggish business performance over the past few months.

Nevertheless, it's expected that the introduction of GST e-way bills with effect from 1 April 2018, will provide a boost to GST collection. But it remains to be seen how much the collections will improve post this implementation.

Sarvajeet Bodas
Sarvajeet Bodas
(Research Analyst)

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5 Responses to "Will the Real Capex Revival Please Stand Up?"


Apr 4, 2018

Capex Revival is waiting to happen. In fact it may have already begun. Look at the latest positive results of manufacturing companies. The revival became slow because the present government has introduced new policies. These new policies are generating new ideas. Some companies are already in expansion mode. Also, globalization has taken back seat now. So domestic consumption will be the trigger for the next capex cycle. Since all companies have to cope with the new policies, both internal and external, and moreover with new technological advances, the capex revival cycle is subdued. But, it is about to pick up. Established companies will drive this revival. This will be followed by the un-organised sector also to keep up with the momentum!



Apr 4, 2018

As per one of Vivek Kaul's article the average capacity utilization of India Incorp is 70-72 % .Hence it may be still time for capex to get started.


Kannan K K

Apr 4, 2018

As long as Financial Viability is there for business finance, company can raise CAPEX in different avenues.


vipin singhal

Apr 4, 2018

suppose , there were no speed bumps -demonetisation,GST & due to hike in GDP, capex cycle started. Scams in PNB, frauds at IDBI, Union Bank Of india, ICICI, AXIS trade war may resulted in red bottom line of such companies who implemented capex cycle leading again more 7 more NPAs. We can't dictate our working environment.


Marushka Vaz

Apr 4, 2018

I believe that a boom in India's consumption story will be the key trigger for the next round of Capex Revival.

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