By Akhil Awasthi
The Government of India’s intent to let “animal spirits of private enterprise” roam free and expand unfettered by feeding them the encouragement of “lower corporate tax” has received an ostensibly feeble response. Data from RBI seems to confirm that Corporate India has not engaged in any meaningful increase in capital expenditure and actually shows a marginal decline.
Private corporate capex in 2014-15 was Rs1.46 trillion, declining to Rs 1.38 trillion in 2015-16. It saw a slight recovery to Rs 1.43 trillion in 2016-17 but dropped again to Rs 1.33 trillion in 2017-18. The trend continued with Rs 1.46 trillion in 2018-19, Rs 1.42 trillion in 2019-20, Rs 1.33 trillion in 2020-21, and further down to Rs 1.28 trillion in 2021-22.
Industry segment-wise perusal of data shows that around 60 percent of loans sanctioned by commercial banks are for the Infrastructure sector. Within this, Power and Roads sub-sectors account for a bulk of loans sanctioned. This was followed, from 2014-2017, by the Metals sector. In 2021-22, the last year for which data was available, no other segment has sanctions in double digits, with Construction at 7 percent, Textile at 4.5 percent, Electrical and Electronics (E&E) at 4 percent, Chemical at 3.4 percent, and Pharmaceuticals at 1.3 percent.
The picture presents capex largely funded directly by the Government Budget (Infrastructure) or through Government schemes like PLI (E&E, Textiles). Only the Construction sector offers hope in terms of capex predicted on so-called “animal spirits.”
Once the lack of increase in corporate fixed asset creation is identified, around budget time, there is an increase in talk about incentives to spur its growth. However, it is better to understand the root cause before prescribing any remedy.
Three reasons acting as a drag on private investment
A holistic view provides possible reasons for the reluctance of corporates in undertaking capital expenditure, including risk aversion, where Indian corporates hesitate to undertake significant capex due to uncertainty in payoffs over a 24-60 month time frame, capability deficit, where management and promoters lack experience in greenfield capex, and market cap asymmetry, where Indian stock markets do not reward capex initiatives as they do deleveraging efforts. Anecdotally, a company announcing capex does not get a positive market response compared to one focusing on reducing debt.
With interest rates at the lower end of the long-term norm for Indian markets and capacity utilization well above 70 percent, the reluctance on the capex front by corporate India remains puzzling.
Where the budget can make a difference
While the budget cannot address issues related to capability deficit and market cap asymmetry, it can certainly address risk aversion. From the vantage point of one of the most successful private equity funds in India, capex and investments can be encouraged through funding small and medium businesses to grow more aggressively, as private businesses can create more incremental value for their equity investors by scaling from small to medium and from medium to large through significant investments. Additionally, small and medium businesses have hands-on promoters, making capability deficit less relevant. Encouraging more aggressive mergers and acquisitions in small and medium sector businesses that are stagnating in terms of overall growth can also be beneficial.
Aligning the desire of SME entrepreneurs and management to grow rapidly with the objective of private equity funds to generate excellent internal rate of return (IRRs) on their investments could lead to a significant uptick in industrial capex, which India sorely needs.
A dedicated policy of allocating capital through NIIF or similar institutions to private equity funds focused on key manufacturing sectors in India, with an explicit mandate of funding primary capex and M&A in small and medium enterprises, may be the solution.
(Akhil Awasthi is the Founding Managing Partner of Tata Capital Growth Fund, an MSME-focused private equity fund. He has over 25 years of private equity experience)
Views are personal and do not represent the stand of this publication.
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