Will Capex Revival Remain a Mirage?

Tue, 22 Dec Pre-Open

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Early this year, large private sector entities were quite ambitious on increasing their gross block. They were optimistic about the government's reform agenda. However, as we can see, things didn't work out as planned by the government. And for the matter of revival in corporate capex (capital expenditure), things on the ground seem to be hardly enthusing.

As an article in Livemint states, a revival in private sector capital expenditure is unlikely to happen in 2016. The reason for the same can be many.

Sluggish economic cycle

The recovery of the Indian economy seems to be at a nascent stage. The government recently lowered the 2015-16 GDP growth forecast to 7-7.5% from 8-8.1% earlier. Growth across various sectors has still not picked up. Many economic reforms are yet to be implemented. As a result, private companies have put their investment plans on hold. Given the subdued recovery and uncertainty, they are less inclined to incur major capex at this stage.

plus capacity and subdued demand

Excess capacities have burdened many companies. As per the Reserve Bank of India (RBI), utilisation levels were near 71% in the first quarter of the current fiscal. So, until these existing capacities are fully utilised, there remains little room to believe that companies will go for additional capex plans.

Another reason why capex will be sluggish in the near term is because of the subdued demand levels. If demand does not pick up, companies won't be confident enough to go ahead with their capex plans.

Focus on small investments and fall in prices of commodities...

The availability of cheap stressed assets has led companies to expand their market share without investing time and capital in greenfield projects. By preferring inorganic growth, companies are holding off on large greenfield investment plans.

Commodity prices are hovering at multi-year lows. Commodity players contribute to a huge chunk of capex. Therefore, it is also unlikely that commodity players will take up large capex spending any time soon.

What to expect?

We believe private investment is far more productive than investments made by the government. It can lead to a broad-based, sustainable economic recovery. However, a lot needs to be done to boost up the capex cycle.

The government should explore innovative ways to restore spending in the infrastructure space. Otherwise, achhe din will remain just a distant dream.

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