The Indian government’s initiatives in boosting the pace of the economy, an environment of prolonged low interest rates and increasing commodity prices are among the key factors that will help revive industrial spending on capital expenditures (capex) back to decade highs seen just before the Covid-19 outbreak, CRISIL Ratings said.
Capital expenditures are outlays for large, long-lasting assets such as plants, property and equipment.
“The external environment for the capex cycle in the current decade will more likely resemble that seen in the first decade of the century (2000’s) in terms of global liquidity, monetary policies, liquidity, and healthy balance sheets,” CRISIL Ratings said.
According to CRISIL Ratings, in the fiscal year ended March 2021, the top 350 of the 15,000 manufacturing firms, excluding infrastructure companies, deferred capital expenditure because of the Covid-19 pandemic, leading an estimated 14% contraction in their capex and a 21-23% decline for the entire industry.
CRISIL attributes the India’s government’s announcement of production linked packages for the various sectors as key to providing a conducive environment for industrial capex to revive.
India has announced the biggest production-linked incentive packages for the core automobile, telecommunication and textile sectors to help revive the pace of economic growth.
The production linked investment scheme has given a much-needed booster dose to capex spending. Without it, capex would have likely taken nearly two years to touch pre-pandemic levels. Actualisation of the scheme will result in aggregate industrial capex rising 1.3 times through fiscals 2022-2024 in comparison to fiscals 2018-2020.
According to CRISIL, the government’s incentive scheme covering 13 sub-sectors, holds the potential to generate INR2.2trn ($29.4bn) worth of capex over the next four years. Of this, nearly 55% of the capex would be concentrated in the three sectors of advance chemistry cell battery, automotive, and specialty steel.
For its part, India’s central bank has kept benchmark interest rates at record low levels since February 2019 to help spur economic growth amid better vaccination numbers and a fall in the daily number of Covid 19 cases in the country.