At a time when adverse global headwinds and weather-related uncertainties pose downside risks to the India growth story, the nascent pick-up in private investment intentions is indeed good news. This is also indicated by a rise in machinery imports in recent months. The fact that investment in capacity creation is “finding traction” features in the Union finance ministry’s latest monthly economic report, which highlighted proposals to set up new investment projects soared to the highest recorded levels in Q4 FY 23, according to CMIE’s capex database.
But these intentions are not broad-based across industries as the power sector in the renewable space leads the charge. That new age sectors like green energy, solar modules and semi-conductors may hike their capex four-fold in FY 24—raising their share in private capex to 11% from 3% in FY 23—also figures prominently in a report in this newspaper . Industrialists, especially in the steel sector, mention that their investment plans are driven mainly by the government’s capital spending; that their capacity utilization is improving as demand is growing. Higher government spending on infrastructure, largely through market borrowings as in Budget 2023, no doubt creates an enabling environment for the crowding-in of private investments, setting in motion a virtuous cycle that will bolster overall growth in an unfavorable external environment.
While these signs of capex revival in new age sectors deserve to be welcomed, there are significant segments of India Inc whose animal spirits are still dampened. As their investment activity remains subdued, there are regular exhortations from the highest levels of the government to overcome a hesitancy to invest. A focus on capacity utilization offers valuable clues in this regard. While these are higher at 75-80% levels for leading companies in steel, cement, automobiles, and chemicals as demand improves, the overall picture is not so assuring. According to the RBI’s latest quarterly order books, inventories, and capacity utilization survey, capacity utilization did improve in the subsequent quarters from the Covid-related lows of 47.3% during Q1 FY21 to hit a high of 75.3% in Q4 FY22. Then it declined to 72.4% in Q1 FY 23 and recovered to 74.3% in Q3 FY23. The trend is downward sloping as the Q3 FY 23 numbers are lower than the pre-pandemic highs of 76.1% in Q4 FY19. New orders, too, have declined and inventory levels registered an increase in Q3 FY23. Unless overall demand for manufacturing goods improves, average utilization rates will not improve to a point where private industry requires additional capacity.
The big question is how to transform these early indications of capex revival into a spiral of higher private investment-led growth. It depends in large part on a more stable policy and regulatory framework. A cyclical upswing cannot be set in motion so long as investors, both domestic and foreign, face serious difficulties in doing business on the ground, especially in the various states. The government, for its part, must implement deep-going structural reforms to free up the land and labor markets. India Inc’s animal spirits then are bound to be rekindled to support the overall pace of economic expansion. The initiation of such reform also has a crucial bearing on the government’s intent to attract foreign investments that are shifting out of China. It is only when these investments materialize that the economy can weather risks due to unhelpful global conditions.