Making sense of sluggish private corporate capex

On March 6, 2024, RBI Governor Shaktikanta Das said the FY24 growth would be “close to 8%” (7.6% as per AE2) because high-frequency indicators like private investment, capacity utilisation and bank credit were showing “uptick”. This is an upward revision of the RBI’s earlier assessment of 7% growth (MPC of February 2024) and came after the Q3 GDP numbers showed an uptick to 8.4%. Ironically, he also projected the FY25 growth at 7% – a fall from “close to 8%” in FY24!

That none of these indicators (the Governor had listed these in December 2023 too) hold up to even 7% growth has been explained in Fortune India article “2024 Ahoy! Can India conjure up 7% growth for the fiscal?”. Here the focus is on private corporate capex alone.

Has ‘Hanuman’ taken off?

The first obvious thing to notice is multiple contradictory claims.

The RBI’s mid-February 2024 bulletin had said the contrary: (a) “Expectations for a fresh round of capex by the corporate sector to take the baton from the government and fuel the next leg of growth are mounting” and (b) “overall, the corporate sector must get its act together ready to relieve the government of capex heavy lifting…”

That was after the January 2024 bulletin said: “The government’s thrust on capex is starting to crowd in private investment.” This was in line with the RBI Governor’s claim in early February 2024 (MPC) that “revival in private corporate investment is also underway”.

The Centre’s budget (speech) of February 1, 2024 for FY25 had agreed with this: “Now that the private investments are happening at scale, the lower borrowings (“small state” and “fiscal austerity”) by the Central Government will facilitate larger availability of credit for the private sector.” This claim needs to be put in perspective.

One, it is a pointer to a new elephant in the room: Centre’s debt ballooning to three times in ten fiscals of FY15-FY24 (RE) – from ₹56.7 lakh crore until FY14 (previous 63 fiscals) to ₹170.6 lakh crore in FY24 (RE) or 58% of the GDP when the FRBM limit is 40%. This is being sought to be curtailed in FY25.

Two, there is yet another contradiction. Neoliberal economics India adopted since 1980s-1990s posits that high public capex crowds-out private capex (hence the advocacy for “small state” and “fiscal austerity”). But beginning with the budget of 2021, the Centre’s public capex saw a “sharp increase” and continued in 2022 budget with the claim that it was “relying on virtuous cycle starting from private investment with public capital investment helping to crowd-in private investment.

Three, notwithstanding its 2024 budget claim on private capex (“happening at scale”), the Centre continues its public capex push – apparently to crowd-in private capex (detailed later).

What is the actual state of private corporate capex?

Budget documents show private GFCF (“realised” private capex) has fallen steeply to 10.3% of the GDP (current prices) in FY23 (RE), up to which data is available (AE2, 2024), and remains below 11% since FY18 – down from a peak of 16.8% in FY08. The average private GFCF for nine fiscals of FY15-FY23 is 10.7% – down from the previous nine fiscal’s 12.9%. This is the reason for continued pubic capex push.

No wonder the RBI has been waiting for private capex to revive for years. Its March 2019 bulletin said: “The year (FY18) marked the seventh successive annual contraction in the private corporate sector’s capex plans.” Capex plans are “envisaged investment”, not “realised” investment that private GFCF shows. The hope for an “uptick” endures.

Also recall Finance Minister Nirmala Sitharaman telling the story of Hanuman’s ability to fly (to Sri Lanka) in 2022 to inspire private capex to move up. She also told them her government had acceded to their demands for tax cut in 2019 and manufacturing incentives (PLI) in 2021.

Centre pumping capex but on infrastructure alone

Budget documents say the Centre’s capex is progressively going up from 1.5% of GDP in FY18 (when the RBI pushed the panic button) to more than double at 3.2% in FY24 (AE2) and is set to be even higher at 3.4% for FY25 (BE).

Reading the 2024 budget speech carefully would reveal that the entire capex push for FY25 is on infrastructure alone. The allocations touch the magic number, ₹11,11,111 crore. What about agriculture (sectoral) that gives jobs to 45.8%? The budget allocation remains below 0.5% of the GDP – 0.47% in FY23 (actual), 0.48% in FY24 (RE) and 0.45% in FY25 (BE).

What about human capital development and social security cover?

Centre cut budget spending by 6% in 26 of 37 major ‘core’ and ‘core of the core’ social and welfare schemes – from FY24 (BE) to FY24 (RE) – impacting health, education, rural development and other areas. Besides, budget spending on these sectors as a percentage is falling in the past years. A budget analysis of 2023 shows, allocations for five key social security schemes (MGNREGS, PMMVY, mid-day meal, ICDS and NSAP) is back to FY07 level – falling from the peak of 0.93% of the GDP in FY10 to 0.36% in FY24 (BE).

What would be the impact of such low spending and cuts?

India would continue to languish in the bottom half in human development (HDI ranking at 134 among 193 countries and HDI score going down from the peak of 0.645 in 2018 to 0.644 in 2022, after consistently rising from 0.434 in 1990).

Remember, India is also home to maximum poor, both before the pandemic (World Bank 2019) and after (228.9 million MPI poor, UNDP-OPHI 2022 and 2023); maximum hungry (233.9 million, FAO et al 2023) and maximum illiterates (at 287 million adults, 37% of the global total in the world (UNESCO 2014, on the Census 2011 count, Census 2021 is yet to commence).

HDI is too critical for growth to be ignored.

China keeps pushing human development, not India

China made rapid growth for 40 years and overtook India after both started from the same level in 1980s. In July 2023, economist Ashoka Mody wrote India can’t be an economic superpower because “China grew rapidly on a strong foundation of human-capital development”, India shortchanged this aspect of its growth.” This was despite China having advantage of relatively higher level of education even in 1980s. Yet, China’s March 2024 budget allocates 2.5 times more on education (15%), social security and employment (15%), health and sanitation (15%) than on defence (6%)!

In sharp contrast, India’s February 2024 budget did the exact opposite. Its allocations for defence (9.5%) outstripped education (2.6%), health (1.9%) and social welfare (1.2%) by miles.

Private corporates not at fault!

Make no mistake, private corporates will jack up capex automatically once demand and optimism in the economy are restored. Without such improvements, no incentive will work – none has for decades.

Here are the missing perspectives:

(i)  Western major economies have grown for over 200 years (18th-century industrial revolution) and can’t grow at higher rate, like an underdeveloped India. Nor for that matter, China, Japan, South Korea or the Asian Tigers.

(ii) India’s claim to be the fastest growing came after the 2011-12 GDP series – which then CEA Arvind Subramanian said overestimated growth by 2.5-3.7 percentage points during 2012-2016. In September 2023, Subramanian and Mody said the GDP growth was overestimated by 2.5-3 percentage points in Q1 of FY24. In March 2024, Subramanian says the same about the FY24 GDP numbers (AE2): “I can’t understand the latest GDP numbers, they are mystifying, and don’t add up.” He says “errors and omissions” are “actually about 4.3 percentage points”.

(iii) Growth in bank credit is driven by (a) personal loans for consumption (beginning with gold loans during the pandemic distress), not for products and services and (b) debt-fueled, not equity-fueled, corporate business model. It may grow more because of the RBI’s “compromise settlements” with corporate defaulters in June 2023, making them eligible for fresh loans after 12 months. Then came the hike in CRAR for banks and NBFCs to check “unsecured” personal loans (total rising to ₹13.32 lakh crore by November 2023, of which banks’ stressed assets (“special mention accounts”) showing unsecured loans to ₹93,240 crore or 7% of the total). Now, the Goldman Sachs says the “Goldilocks era” for banks is ending due to margin compression and stretched credit-deposit rate. The RBI flagging widening of credit-deposit gaps since 2022. NBFCs are now panic-stricken.

(iv) Headline employment numbers are rosy (unemployment rate falling to 3.1%, employment rate and LFPR zooming to 58% and 59.8%, respectively, in the PLFS for 2023 calendar year) but scratch the surface and the job crisis is glaring. Economists Maitreesh Ghatak and Mrinalini Jha analysed PLFS data to warn “the rising spectre of a vicious cycle” to undermine demographic dividend because “a majority” of workers are in “low quality” jobs and wages have “stagnated”. Raghuram Rajan too warned about disappearance of demographic dividend by 2047 if the current growth model continues.

Finally, a look at the state of demand and optimism in the economy.

Muted demand and optimism

· Budget documents show post-pandemic consumption is sluggish – PFCE’s GDP share falling from 58% in FY22 to 55.6% in FY24 and PFCE growth (7.1%) lagging that of GDP (8.1%). During the first three quarters of FY24, PFCE grew at 3.7% (constant prices) – while the GDP grew more than double the rate, at 8.2%.

· Nomura analysis says the economic shocks of demonetisation of 2016, GST of 2017 and the pandemic of 2020 and 2021 derailed (CAGR) growth in ‘real’ consumption expenditure during 2012-23 (to 3.1% in rural and 2.6% in urban areas from 4% and 4.4%, respectively, during 2005-10 and 6.6% and 5.2%, respectively, during 2010-12).

· FMCG sector is seeing decline in volume sales and revenue to multiple year lows (volume sale hitting 14-quarter low of 2.5% in Q3 of FY24 and revenue growth lowest after Q2 of FY21).

· Manufacturing’s capacity utilisation (CU) is below 75% – touching or crossing 75% only on three occasions in the past 20 quarters.

· RBI’s enterprise surveys of Q3 of FY24 points to rise in business optimism in services and infrastructure for subsequent three quarters but not for manufacturing (significant improvement expected only in Q2 of FY25). Consumer confidence (one-year ahead) is on “recovery path” and remains below 50% – lower than pre-pandemic highs of 60% or more.

Little wonder, corporate capex is not taking off despite all-time high profits (touched a historical high in 2020 but moderating thereafter) and robust bank balance sheets?

Even foreign private investment (FDI inflows) has dried (due to exogenous factors). Growth in FDI inflows hit the second lowest in nearly quarter century, at -16% growth in FY23, the lowest since -26% in FY13. It fell further to -31% in H1 of FY24. This has made the Centre to seek inputs to figure out the answer and frame a response.