Will the budget 2024 fuel private capex?

FM Nirmala Sitharaman

The Interim Budget to be presented by Finance Minister Nirmala Sitharaman will be keenly watched for the Union government’s plans on public capex spending, which has been a driving force for economic growth and is expected to be a catalyst for driving a broad-based revival in private sector capex.

In a 22 January report, analysts at Nomura noted that the focus on public capex has been a deliberate policy choice by the government to address India’s considerable infrastructure deficit and a substitute for lacklustre private capex in the hope that the latter will be eventually ‘crowded in’.

“As we flagged in our 2024 economic outlook, there has been a post-pandemic uptick in private capex but a broad-based recovery still seems elusive, underlining the importance of continued momentum in public capex,” the Nomura report said.

Analysts at the Japanese brokerage expect the government to pencil in a 16.5 percent rise in capex outlay in FY25 (compared with 36 percent budgeted in FY24), which should keep central government capex elevated at 3.4 percent of GDP.

To be sure, there is a rising optimism over the growth of private capex in recent quarters, as animal spirits seem to be roaring back, and thus government intent on public capex spending in the budget will be keenly watched for.

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HDFC Mutual Fund in a 12 December report noted that while government capex continues to grow at a strong pace, private capex is also seeing a turnaround, owing to the introduction of supportive policies by the Government.

Also Read: Budget 2024: Will India's private capex cycle please stand up?

“CMIE (Centre for Monitoring Indian Economy) data indicates that 86 percent of new project announcements (in INR terms) in the past 12 months were from the private sector. Capex reported by listed corporates has also seen a sharp growth – over 2 times between FY2017-19 Rs 10-12 lakh crore range and FY2024 trailing 12-month level of Rs 23.9 lakh crore,” the report said.

This rise has been primarily driven by key industries such as energy, automotive and industrials.

The rise in capacity utilisation levels also augur well for private capex, HDFC MF noted.

“At the aggregate level, capacity utilisation (CU) in the manufacturing sector stood at 73.6 percent in Q1FY2024. While this is lower than Q4FY2023, this is higher than the CU in the same quarter last year (72.4 percent in Q1FY2023). Furthermore, the seasonally adjusted CU for Q1FY2024 improved by 130 basis points (bps) from its level in the previous quarter and stood at 75.4 percent. This rise in CU should ultimately result in new capacity addition over time,” the report said.

Pradeepa Kuppusubramanian, Head of Credit Research, Acuity Knowledge Partners, commented that the interim budget would focus on fiscal consolidation while pursuing capex-led economic growth.

“Government capex has supported investment growth over the past few years (22 percent CAGR between FY18-FY24); however, the capex growth could be relatively low this year to support growing subsidy bill, meet fiscal consolidation target and perhaps meet some populist poll promises,” she said.

The key beneficiaries of this budget could be railways, power, defence and manufacturing sectors, she added.