Private capex still on sidelines; may pick up towards 2024-end: Fitch Ratings' Zook

n the Interim Budget for 2024-25, which was presented on February 1, Finance Minister Nirmala Sitharaman pencilled in a capital expenditure of Rs 11.1 lakh crore, a growth of 11.1 percent over 2023-24.

A key risk to India's impressive growth outlook is the lag in pick up in private capital expenditure (capex) cycle so far, which is partly due to the subdued consumption levels in recent quarters, says Fitch Ratings' Asia Sovereign Ratings Director Jeremy Zook.

"This means capacity utilisation hasn’t picked up quite fully to high levels, which would bring in private investment more heavily. So, a risk is, if we don’t see a turnaround in some of these consumption metrics that may lead to private capex staying on the side-lines," Zook told Moneycontrol.

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The Reserve Bank of India in its March bulletin had noted that aggregate demand in the third quarter of 2023-24 was investment-driven, with some indications of a revival of the private capex cycle, adding that capacity utilisation in several sectors has reached a point where there has to be new investments. The high visibility of structural demand and healthier corporate and bank balance sheets will likely be galvanising forces.

Zook said that though public capex has been supportive, if the government is hoping to consolidate, then the strong growth impetus seen so far may fade. "So, it is really about that private investment coming in more fully and then that also relies on the domestic consumption outlook," he added.

The Indian government has been focused on the investment-led growth model. In the Interim Budget for 2024-25, which was presented on February 1, Finance Minister Nirmala Sitharaman pencilled in a capital expenditure of Rs 11.1 lakh crore, a growth of 11.1 percent over 2023-24.

In monetary terms, the capex allocation for FY25 has increased, but in percentage terms it decelerated from around 35 percent in the previous three financial years.

On the other hand, India's world beating GDP growth of 8.2 percent of GDP for FY24 comes with a private consumption levels of 4 percent, a 20-year low outside the pandemic year, as well as a slowdown in rural growth.

Zook said that what underpins their view on India’s strong growth is that relative to the pre-pandemic period, banks and corporate balance sheets are in quite a healthy position and that should facilitate an improvement in the private capex cycle over the medium term and drive these relatively strong growth rates.

"One factor that could help bring in private capex more towards the end of this year would be rate cuts that could start towards the end of this year and also, we see the RBI initiating some modest rate cuts around the same time. So, such a trend in the interest rate cycle should support lower borrowing costs and more policy uncertainty around global financial conditions, which could then bring in some of the private capex more aggressively," he added.

On June 7, the RBI decided to keep its policy rate unchanged at 6.50 percent, unchanged for the eighth time in a row. Some economist expect a rate cut to come in only later in the year around October.