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Is India's capex cycle reviving?
Fri, 3 Jul Pre-Open

The financial news networks just can't get enough of the crisis in Greece it seems. Every day we are bombarded with stories about the crisis and how it might impact India. Despite clear evidence that the fallout will be limited; people are concerned about the possible fall in stock prices. We believe such types of panics are very common in financial markets. They are caused due to investors losing focus of the fundamentals and getting carried away by their emotions. Instead of worrying if Greece will be kicked out of the Euro zone; investor should pay attention to important changes happening in the Indian economy.

Perhaps the most important change we believe is the revival of the capex cycle. For the last 2-3 years, companies had literally stopped investing in their core businesses. Policy paralysis of the UPA regime, land acquisition issues, environmental clearances, bureaucratic red tape, corruption high interest rates as well as general apathy had all combined to form a heady cocktail of problems. These problems had brought the capex cycle to a grinding halt. Now though, things might be finally looking up.

The first one year of the Modi government did not see a revival in business capex. This was due to the absence of many big bang reforms as well as the government's attempts to first speed up bureaucratic procedures before launching new projects. Now though, thing have begun to get a move on. As per a report in the Economic Times, there has been a huge pick up in the government's capex spending in the first two months of the financial year. A flurry of tenders and orders has been issued. The major sectors that stand to benefit are roads, railways and power.

This has already begun to reflect in the data for industrial growth in April 2015 as well as the core sector growth in May 2015. The stock markets have quickly caught on. The BSE Capital Goods index has risen nearly 10% in less than 2 months. It may be a little too early to celebrate. It will take a while for these orders to reflect in the financials of companies. Also, private capex which is a lot more productive that government capex hasn't picked up yet. Despite this we believe that we could be witnessing the first signs of a turnaround in the Indian economy. If this is the case, then investor's worries over a possible Grexit could soon be a thing of the past.

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