Moneycontrol Pro Panorama | Budget 2024 and the capex conundrum

Corporate and private sector capex, although improving, needs support to sustain.

Dear Reader,

The BSE capital goods index and the BSE India infrastructure index rallied 50-60 per cent in 2023. Investor expectations are that the robust earnings growth expected in Q3 FY2024 will back this rally.

But this is not to say that capital expenditure (capex) in the private sector, especially corporates, is growing at a fiery pace. On the contrary, the share of corporate capex during the first six months of fiscal 2024 (H1 FY2024) declined to a decadal low, points out data in today’s Chart of the Day. Within the private sector, household savings’ share in total investments in the country has grown to partly find its way in investments in residential real estate, translating into growth in sales and utilisation levels in industries such as cement and steel.

In other words, corporate and private sector capex, although improving, needs support to sustain and keep the wheel of economic growth turning. What this means is the government may not pull back capex hurriedly in the forthcoming interim Budget. In fact, the share of government capex (Centre and states) grew from about 11 per cent to 16 per cent between the pre-pandemic period and now.

The government’s capex, of course, may be biased in favour of roads, railways, defence, ports and green energy that are critical to its stated mission, points out this article.

But then, given that the fiscal deficit is much higher than the budgeted 5.9 percent of GDP for 2023-24, it may be a challenge to increase capex. Besides, an interim Budget is usually a populist one, says Manas Chakravarty in this article, where he details the pattern of the 2019 pre-election Budget. This time around too, the government has to balance populist policies, capex to keep up the pace of economic activity that is reckoned to be luring direct investments into the country and fiscal compression.

Even from an equity investor stand point, it is important to note that earnings traction must not be mistaken for strong private sector capex. After all, capacity utilisation on the back of high corporate capex in 2017 is yet to rise to optimal levels that justify further investments. Earnings growth in the capital goods and infrastructure segment during FY2024 is more due to a drop in raw material costs rather than revenue growth.

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