Private investment picking up, shows rise in capital goods output: ICICI Securities

The economists noted that whenever India's real GDP growth has been between 7 percent and 9 percent, there have appeared signs of overheating between the third and fifth year.

Private investment seems to be gaining momentum, going by the pick-up in capital goods output, an ICICI Securities report said.

Market watchers have been waiting keenly for any sign of a revival in private capex, especially since some see the possibility of public capex going down to manage fiscal deficit. Goldman Sachs, in its October report, had said that a pick-up in private capex was "imperative" since "the growth in government capex seen in the past few years cannot be sustained going forward".

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"Capital goods output grew 22.6 percent YoY in October 2023, pulling up growth in April-October 2023 to 9 percent YoY, clearly indicative of a solid acceleration in fixed investment spending. Further evidence of the broad-based investment rebound comes from the 12.3 percent YoY growth in infrastructure/construction goods in April-October 2023," wrote economists at the brokerage in their latest strategy report.

Capital goods output has "accelerated sharply" in the past three months, they said, pointing out that industrial output has gained momentum over the last three months. In October 2023, industrial growth was 11.7 percent but that was helped by a calender effect. That is, October 2022 had a concentration of holidays, which had shortened the working month and gave rise to a low-base effect.

But, a 9.4 percent on-year industrial growth (and 8.2 percent on-year rise in manufacturing) in the three months leading up to October 2023 (August to October) showed "impressive momentum".

The economists wrote that they had forecast a manufacturing growth of over 8 percent for H2FY24 going by the low base effect. But, "the broad-based rebound that now encompasses hitherto-weak segments such as consumer durables amid acceleration in infrastructure/construction and capital goods, suggests that the investment-led rebound is set to gather pace".

Given this growth in manufacturing output and the 8.5 percent growth in services, the economists have maintained their real GDP forecast of 7.9 percent for FY24. The Reserve Bank of India's forecast for the same stands at 7 percent after the recent hike in estimate.

The economists noted that whenever India's real GDP growth has been between 7 percent and 9 percent, there have been signs of overheating between the third and fifth years "with widening of the current account
deficit (CAD) and a surge in inflation".

Also read: 4 reasons why the Indian corporate market is set to double by FY30, according to CRISIL

This time, they expect a better outcome. "This time, we expect a current account surplus in FY24, although real GDP is likely to grow 7.9 percent (after averaging 8.1 percent in the previous two years). CPI inflation edged up to 5.55 percent YoY in November 2023, but should moderate to 4 percent YoY by March 2024, as cereals (foodgrain) inflation eases from January 2024 onwards," they wrote.