Private inflows buoyed despite headwinds
India’s decade-long wait for private investments seems to be finally ending. According to the RBI, FY23 saw a record capital outlay of Rs 3.5 lakh crore—the highest since FY15. Of this, about 40% is likely to be spent this fiscal. If you include the amount corporates raised via internal sources, FDI, IPOs, FPOs and rights issues for capex purposes (which RBI didn’t take into account), the total private investment will be even bigger. The cleaner balance sheets of banks and corporate borrowers, rising capacity utilisation, improved business outlook and demand conditions, and government interventions supporting investment activities indicate that the return of animal spirits could well be on the cards. The reason for optimism is also that FY23’s investment was almost double the amount seen during FY22 at Rs 1.96 lakh crore.
Following the twin balance sheet problem, the private investment cycle has slowed since FY14 and India’s gross fixed capital formation (GFCF) fell dramatically. An RBI study released this week showed that the average share of envisaged capex to GFCF fell from 40.5% during FY1972–FY2011 to 15.5% during FY11–FY22. It also found that a 1% increase in private investment intentions leads to a 48 bps increase in gross fixed capital formation of private corporates. The revival signs of the current capex cycle seen since FY22 may indicate the investment climate picking up within the economy.
Usually, infrastructure sector projects comprising power, telecom, ports and airports account for a 60% share of total investment projects. But in FY23, while infrastructure retained its top slot, the composition saw a shift to roads and bridges leading the pack, thanks to the government’s ‘Bharatmala’ push, unlike power and telecom that ended up in debt. State-wise, the top five, namely UP, Gujarat, Odisha, Maharashtra and Karnataka, together accounted for a 57.2% share, but there’s a need for broad-based investments. Investment and consumption drive economies, but the latter is hit by inflation, which in turn is moderating corporate sales and holding back private investment. Though the uptick in private capital outlay is encouraging, the higher cost of capital due to monetary policy tightening, global uncertainties led by geopolitical tensions, and the risk of a slowdown in advanced economies could hamper investment activities.