MUMBAI: The economy is in for a much-delayed revival in corporate capex, which has in fact stalled after the record capacity additions seen in the boom years of the first decade of the millennium. But that is about to change, if an S&P analysis is to be believed which forecasts an $800 billion capex between the current fiscal and fiscal 2030 and an additional $1 trillion during FY31-35.
Since the investment spree ending by fiscal 2012, the economy has been growing primarily by government capex, hence the trend growth never crossed 7%.
“By our estimates, corporate capital spending will be about $800 billion between fiscals 2026 and 2030, driven largely by infrastructure investments. We assume a further $1 trillion in outlays between fiscals 2031 and 2035, driven by next-level investments and more research and development,” S&P Global Ratings credit analyst Neel Gopalakrishnan said in a note issued from Melbourne Tuesday.
Improving infrastructure, political stability, and lean corporate balance sheets are propelling large expansions plans that will widen revenue bases for corporates, he said, adding "supportive government policies are helping, these include a focus on domestic self-sufficiency, more exports, and development of a supply-chain ecosystem.
“These factors are similar in scope to the momentum that created years of rapid expansion and market gains for China's corporate sector in the 2000s,” Gopalakrishnan said drawing a parallel between China’s rapid growth in the first decade of 2000 and that of India.
India's corporate growth path has some overlaps with China's in the 2000s. Top Indian companies may double spending and capital expenditure over the next five years as revenues and profits jump and this growth spurt could transform more domestic companies into larger franchises domestically and globally, says the report titled ‘Indian corporates: Differences and parallels with China in the 2000s.’
But there are some key differences. Falling trade barriers were behind China's export-led growth model and its ability to attract foreign investment and higher GDP growth rates were also positive for corporates. China’s economy grew at over 10% on average in the 2000s. In comparison, S&P economists expect trend growth in India to be around 6.5-7%.
Indian companies will face tighter financing conditions than their Chinese counterparts during their high-growth phase but this could help them avoid a large debt buildup as occurred for many Chinese corporate sectors.
"We also believe leading Indian corporates could more than double their operating profit over the next 10 years, without a material increase in leverage," said Gopalakrishnan.
"Our baseline view is that India's growth momentum will stay strong, and its industrial base and supply chains will get deeper and more efficient," he said, adding, "Execution risk nonetheless remains high. Some of the positive developments over the past decade could be the result of a stable largely one-party government. Political changes would be a key risk."
"The federal system of democracy can complicate decision-making, it said, adding at the corporate level, bureaucracy and red tape can stall execution in infrastructure and other major projects. Land acquisition negotiations can be quite lengthy, for example. We also think R&D spending is low, and skill gaps are high in certain niches," he said.
“China permanently changed the global playing field. No single country dominated global output in the 2000s to the extent that China does now. Even if India executes its growth potential well, industries will need to compete with China's industrial might,” he concluded.
