A raft of reports are emerging from economists, brokerages and rating agencies forecasting that India is at the start of a large capex cycle. Morgan Stanley’s widely respected economist Chetan Ahya goes one step further: He forecasts that India’s Gross Fixed Capital Formation or GFCF as a percentage of GDP will go up by six percentage points in the next five years and that will ensure a sustained real GDP growth of 7 percent for four years from FY23 to FY26, Ahya says.
A word on GFCF before we recount the arguments of Ahya and the other side. GFCF, as the abbreviation indicates is the amount of investments the country is making as a percentage of GDP. It stands to reason that if a country invests more, it will generate higher GDP. India’s GFCF as a percentage of GDP climbed steadily from 15 percent in seventies to 20 percent in the eighties, to 25 percent after the liberalisation of 1991 and reached a high of 36 percent in 2010. Thereafter, it has steadily declined and was at 27 percent for FY21.
GFCF’s link to GDP is intimate – India’s GDP growth rose from the Hindu rate of 3.5 percent in the seventies to 5-6 percent in the nineties, to 7-8 percent from 2000-2010. Thereafter, it has declined to around 6 percent in the last decade. If GFCF can indeed climb to 33 percent as Ahya is forecasting, the chances of a sustained 7 percent GDP growth brighten up.
Crisil’s capital goods analyst Isha Chaudhary and Credit Suisse’s Lokesh Garg both point out to the same drivers: tax cuts, the government’s performance-linked incentive (PLI) scheme gives tax cuts for incremental sales, demand rebound post-pandemic, lighter corporate balancesheets thanks to higher commodity prices and consequent deleveraging, cleaner bank balance sheets after the write off of NPAs in the past four years and a benign global environment. Both analysts also point to the significant investments being made in energy initiatives – like the Rs 75,000 crore investment by Reliance Industries Ltd (RIL) into green hydrogen as well as into inputs for solar energy like silica, polysilicon etc. Other groups like Adani, Jindals and Tatas are also assiduously investing in greening their own processes.
Lokesh Garg of Credit Suisse says he expects the capex cycle to zoom on (1) manufacturing, (2) public spend on key sectors, and (3) energy transition.
“GFCF has come down from the peak of 34 percent to 29 percent. Private corporate capex (manufacturing, services and real estate) has trended back to 10 percent of GDP after a spike to 14 percent of GDP over FY05-08. We expect the infra capex (US$125 billion in FY20) to grow at 10 percent+ CAGR (USD terms) after stagnating since 2012, and industrial capex (US$350 billion) to grow at 12 percent+ CAGR”.
Samiran Chakrabarty, a veteran economist from Citi points out that manufacturing capex forms only 15 percent of the total GFCF. Housing is the biggie with a 22 percent contribution and if one adds construction and attendant goods, the total contribution to GFCF from these three is 40 percent. So to move the needle on capital formation, real estate and construction have to pick up. Neelkanth Mishra, also of Credit Suisse agrees and points out that indeed real estate seems to be waking from a long slumber thanks to big hiring by IT companies.
Mishra adds that corporate investment for digitisation and software accounted for a good 50 percent of their incremental investment from 2016 onwards. Even if this dropped to 40 percent of incremental corporate GFCF, it is sizeable and continuing. Also, Indian IT companies have almost doubled their hiring for the new wave of digitisation post-pandemic. This also will trigger a multiplier impact on the consumption of a range of goods and services from homes to transport to entertainment.
The elephant in the room still remains demand. Job creation and aggregate demand were slowing well before the pandemic, Samiran points out. Neelkanth counters that this pre-pandemic slowdown was due to the
NBFC crisis which has now been resolved. He may have a point, but it can’t be denied the economy was slowing even before
demonetisation and the NBFC crisis. Ahya also agrees that the informal sector has been scarred by the economic slowdown of the last decade, demonetisation, GST and finally, the pandemic. Samiran, therefore, worries that the robust growth the Indian formal sector has seen due to easy money policies is restricted to the top 20 percent, while chunks of the bottom 75 percent may be permanently scarred. Labour productivity, already declining, can take a bigger hit. Both these will impact GDP.
In this context, Samiran raises another interesting issue. Can India churn out 7 percent growth purely on the strength of the top 25 percent of its population? This proposition merits a detailed debate. Because even 25 percent of India works out to a solid 350 million people, and would still be the largest single economy after China. But such a growth of only the top quintile may have social ramifications and indeed even economic ramifications. Samiran is, more comfortable betting that India’s potential growth may have slowed to 6 percent.
The growing chorus, however, probably abetted by the booming stock markets, is that India is standing on the threshold of a multi-year growth of 7 percent, much like between 2004 and 2008.
Disclosure: Network18, the parent company of CNBCTV18.com, is controlled by Independent Media Trust, of which Reliance Industries is the sole beneficiary. (Edited by : Ajay Vaishnav)
