Is Strong Evidence Emerging on Capex-cycle Revival?

Capex cycle peaked in 2011 and since then, it has been a decade-long wait for its revival. Every year since 2015, there appeared new reasons year-after-year for its revival, only to be let down by one or the other mishaps. Some, self-manufactured like DeMon or ill-prepared GST launch and some have been the force-majeure like Pandemic. It has been the story of “almost there, yet never there” kind for the capex revival. Sample this, “The upturn in the current investment cycle, which began in 2016-17, is estimated to last up to 2022-23 when the investment rate is estimated to increase up to 33 per cent from the current level of 31.4 per cent.” This was from none other than RBI when it quoted its study in the middle of 2018. That hope was belied by the sharp slump in 2019 that got triggered by the most ill-conceived and regressive budget then. Conversations of revival is once again back on the center stage with utilizations going up in much of the core industries. Will 2021 be any different? Let us find out.

First, why is it that there is a sudden rush to callout the capex turn? What has changed now? One reason could be that in India’s capex cycle, never before, we had the combination of right Govt. policies (PLI), concessional corporate tax, commodity super cycle, China pushback (China-plus-one and de-risking Chinese imports), high industry utilization and low interest rates coming together to conspire a big turn in the investment demand. Also, China’s stringent environmental controls couldn’t have come at a better time, indirectly boosting domestic manufacturing esp. in chemicals, metals and steel. While some of these factors came into play in isolation in earlier years, like low interest rates and high utilization etc., it is for the first time that all of these are coming together, lending credibility to the optimism now. We did hit high utilization numbers (above 70% level which normally triggers the capex turn) at least on two occasions in the last

few years which later fizzled out because of the subsequent slump in the economic activities. But this time, the powerful combination of various factors could end up pumping the spirits of the corporate chieftains to unlock their investment plans.

But, still, is it not all of this is in the realm of speculation? To back this up, one needs to look at what corporates are actually doing on the ground. This is where, one gets to see evidence that this time, it could be really different. Sample the expansion plans announced recently by leading companies in the core sector:

  • Outlay of over $15Bn by top steel companies
  • Expansion projects worth $5 Bn by leading cement companies
  • Over $15Bn commitments in new projects by Oil & Gas companies (20% of this has already been spent in the first quarter itself reflecting the urgency in expansion)
  • $10Bn investments in the power and coal
  • $5Bn outlay in non-ferrous sector

It doesn’t stop here. If one adds the activities in the renewables, ports, gas pipelines and chemicals, outlays this time look promising and they can materially turn the cycle. More so, if the additional support comes from the turn in the credit cycle. With NPA clean-up nearing its end and with rising capital buffer in balance sheets, Indian banks are getting ready for the new credit cycle. Further, asset monetization through InvITs (Infrastructure Investment Trusts) by PSUs and other entities will go a long way in releasing funds for these entities to start fresh capex cycle. After power, the country’s oil PSUs would now float an InvIT as part of the asset monetization exercise and raise funds for new investments. For the Government, building gas pipeline infrastructure through this route is a key priority.

The reason why we are keen to decipher the dynamics in capex cycle is because of the significance it has on the overall economic growth. Solid turn in investment cycle can feed off into consumption demand which in turn can fuel investments further in a self-fulfilling fashion to set off a virtuous cycle for the economy, esp. when the cumulative impact of past structural reforms (IBC, GST, RERA etc.) are about to play positive for the macro. Such is the power of capex cycle.

Only time will tell us whether we are at the cusp of another boom in the capex cycle. With global companies looking at India as a serious option to derisk their supply chains, time couldn’t be more right for the cycle to turn, esp. when China is ready to extend unsolicited favors by increased tightening of its environmental norms and by resorting to export controls on steel, metals etc.  Interesting time to watch out for!

This article of mine was published in the online edition of Economic Times (30/06/2021). Glad to share the link: