India Inc banks on govt spending before drawing up investment plan

“As of now, even large corporations are in the process of deleveraging and cleaning their balance sheets. They are in no hurry to leverage and invest and they will wait for demand to pick and capacity utilisations to rise before they go for expansion. I think big private sector investment is still 12-18 months away,” said a top banker who did not wish to be named. He added that while some ancillary demand will rise following public investments and it may result in some investments in those areas, but big private sector capex will take some time.

There is, however, a sense among industry leaders that the big-budget push by the government on public capital investment, is the best that the government could have done at this point of time and that needs to continue over the next 1-2 years.

While the government seems inclined to provide the initial push, it expects the private sector to follow up and play its role. “The virtuous cycle of investment requires public investment to crowd-in private investment. At this stage, private investments seem to require that support to rise to their potential and to the needs of the economy. Public investment must continue to take the lead and pump-prime the private investment and demand in 2022-23,” said the finance minister in her budget speech.

But, India Inc seems inclined to wait and focus more on improving their balance sheet and wait for demand to reach a critical mass.

The RBI data shows that at an aggregate level, capacity utilisations for the manufacturing sector declined to 40 per cent in Q1FY’21 and then rose to 69.4 in Q4’FY21. It, however, fell to 60 per cent in Q1FY’22. While the situation seems to have improved over last couple of quarters, industry insiders say that the capacity utilisations will have to reach a critical mass before they can step in.

“There is optimism in the market, but as of now it will be mostly driven by government. The investment and borrowing will be mostly quasi-government for sometime now. Once the confidence on demand front comes back, then the economy may start witnessing big investments from the private sector,” said the head of a financial services firm.

On Tuesday, the markets rose and stood their ground after the budget announcements and the benchmark Sensex and Nifty and BSE and NSE rose 1.5 and 1.4 per cent respectively, in affirmation to the budget announcements. In line with the big capex push by the government for infrastructure, the metal index and capital goods index at BSE jumped 4.9 per cent and 2.9 per cent respectively. Even the industrial and banking indices at BSE rose 1.7 per cent and 1.3 per cent respectively.