India's capital expenditure outlook has brightened with the conclusion of key state elections, paving the way for a rebound in government and private sector spending in the second half of FY25. Experts said that post-election clarity is expected to drive public infrastructure investments, while private capex could pick up momentum after Q1 2025 amidst improving economic conditions.
The government had set an ambitious capex target of Rs 11.11 lakh crore for FY25 in the Union Budget, significantly higher than the Rs 9.5 lakh crore spent last year. While there may be some under-shooting of this target, it is still expected to mark a substantial year-on-year increase, according to Department of Economic Affairs Secretary Ajay Seth.
“Even last year's budgeted capex of Rs 10 lakh crore was achieved at 95 percent, and we should be around the same percentage this year,” he said at an event in Delhi last week. Seth added that any election-related delays in spending will be compensated by growth in other sectors.
Government to get into driving gear, with election worries behind
The first half of FY25 witnessed a 17 percent year-on-year decline in public capex, largely attributed to the election cycle. Vikas Khemani, Founder of Carnelian Asset Management and Advisors, explained: “This is typical around election cycles. It takes time for the government to get back into action. I believe the capex cycle in the second half will be far better than in the first half.”
In a separate note, Motilal Oswal Research also said that with the elections now behind, the government is expected to refocus on spending. The next state election is in Delhi, due in February, and then in Bihar, due in October-November 2025.
Private capex: Green shoots visible…
Meanwhile, private capex may have seen some early indicators of an impending pick up. The listed corporate capex hit nearly Rs 10 trillion in the trailing twelve months ending September 2024, said ICICI Securities in a note. This was 18 percent higher from a year ago, and was driven by old-economy sectors such as energy, metals, and industrials, said the note.
Further, there was a shift from maintenance capex to discretionary capex, with the capex-to-depreciation ratio climbing from a cyclical low of 1.78x, indicating the early stages of a broader upcycle.
The brokerage also drew parallels with the 2001-04 phase, which preceded a period of exponential growth in capex. With capacity utilisation levels reaching an inflection point and industry credit growth at a cyclical low, there is ample room for re-leveraging. “The cycle-low gross NPAs and robust financial savings provide a conducive environment for private investment,” said the note.
… Yet, challenges abound
A sustained pick up in private capex hinges upon broad-based economic recovery, said Santanu Sengupta, Chief India Economist, Goldman Sachs. The near-term growth is constrained by global uncertainties, he said in an interaction with CNBC TV18.
“It’s difficult to imagine private capex picking up significantly over the next two or three quarters. However, we may begin to see recovery potential after Q1 of the next calendar year, especially if it becomes broad-based rather than concentrated in specific sectors,” said Sengupta.
Further, he flagged constraints on state-level capex due to rising revenue expenditures.
Experts see India’s domestic savings as a crucial driver for funding infrastructure projects. ICICI Securities said that gross financial savings and net foreign inflows provide key support for capital formation. Further, Sengupta said that quasi-sovereign entities like NABFID and potential foreign bond index inclusions could be leveraged to channel funds into infrastructure development.
The overall economic outlook remains positive, with the government confident of achieving its fiscal deficit target of 4.9 percent for FY25. Economic growth estimates of 6.5-7 percent for FY25 also remain intact.
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