Over the past six months, the proportion of foreign companies in private sector investments aimed at the construction of new factories and facilities has diminished. This decline is a result of a surge of significant domestic announcements and a moderate slowdown in foreign capital expenditure plans, although foreign investments remain near peak levels.
Data analysis by Business Standard using the project tracker Centre for Monitoring Indian Economy (CMIE) reveals that the foreign companies’ contribution to overall private sector investments for the four quarters ending June 2023 has dropped to 14.9 per cent. The proportion was at 21.9 per cent in December 2022 and 16.5 per cent in March 2023.
The rolling four-quarter figure negates any seasonal fluctuations in new project announcements. Over the four quarters ending in June, the private sector announced new projects valued at Rs 27.5 trillion, marking the highest level in data tracing back to June 2009. A substantial portion of this surge is attributed to the Rs 11 trillion capital expenditure (capex) announcements in the quarter ending March 2023. This quarter also recorded substantial orders from Air India for new aircraft, which are counted as capex.
Before this large order, there was already a growing momentum for new project announcements. The trailing four-quarter announcements exceeded Rs 10 trillion in March 2022 and have consistently stayed above this mark. Foreign private sector company announcements peaked at Rs 4.9 trillion in December 2022, on a rolling four-quarter basis, dipping to Rs 4.5 trillion in March 2023 and then to Rs 4.1 trillion in June 2023.
To reduce reliance on China, many companies are investing in factories elsewhere. Business Standard had previously reported on the intense competition from other Asian countries, including locations like Vietnam, which have successfully drawn key players to relocate their manufacturing facilities. In 2022, Chinese electronics giant BYD moved some of its Apple iPad production to Vietnam.
However, there are positive signs for the industry. The production output of eight crucial infrastructure sectors, including steel and cement, grew by 8.2 per cent in June, marking the highest rise in five months.
Banks are extending more credit than before, with credit off-take growing by 16.2 per cent in June 2023, up from 14.5 per cent in June 2022. Industrial credit grew at 8.1 per cent, compared to a 9.5 per cent growth a year earlier. Credit off-take in the services sector surged by 26.7 per cent, up from 12.8 per cent previously.
A report from the financial services group Jefferies, authored by equity analyst Lavina Quadros, predicts a compound annual growth rate (CAGR) in double digits until the financial year 2026 (FY26), given relatively low corporate debt levels.
“Since 2021, the Centre has prepared the groundwork for double-digit capex growth by planning to divert incremental spending to capex…Our bottom-up corporate capex database points to 16% CAGR in industrial capex from FY23 to FY26E. The gross debt-to-equity ratio for large listed companies is below 0.6x, suggesting capex can be comfortably financed between internal accruals and some leverage,” the report stated.
A May 2023 report from LGT Wealth India also anticipates a substantial investment push.
“In FY24, investment will likely be the primary driver of growth, with robust public investment supplemented by the fruition of large corporates’ investment plans – the Centre should invest Rs 10 trillion, states should contribute around Rs 7 trillion, and the private sector should at least match, if not easily exceed, these outlays,” it stated.