Capex dips in Q2, may stay muted for a while

Projects worth ₹1.2 trillion were announced by companies during the July-September period, marking a whopping 82% sequential decline and 77% year-on-year decline. The figures are provisional and may be updated later.

“With aggressive interest rate hikes since 2022, a slowdown in global demand, increased geopolitical risks, and rising protectionism globally, a reduction in project announcements is not surprising,” said Sujan Hajra, chief economist and executive director at Anand Rathi Shares and Stock Brokers. “Furthermore, the consumer demand structure in India is shifting away from manufactured products and towards services.” These factors are likely to impact the pipeline of investments in the near term, economists believe.

Ahead of the 2024 Lok Sabha elections, a host of other factors such as the global slowdown and domestic policy uncertainty could keep new proposals on the sidelines. “As of now, there has been a slower momentum in the previous quarter or so and probably it will get a little slower as we move on to the election period,” Madhavi Arora, lead economist, Emkay Global Financial Services said. “But that is typical of any kind of investment and does not mean there is an overall negative scenario.”

Before the 2019 general elections, around ₹9.9 trillion worth of projects were announced between April and September 2018, which dropped to ₹9.2 trillion in the following two quarters. Similarly, in the run-up to the 2014 polls, the value of project announcements dropped 15% in the second half of the 2013-14 compared to the first six months, the CMIE data showed.

However, Hajra cautioned that the apparent connection between project announcements and election cycle was, at best, hazy, and could not be seen as revealing any direct link.

While both government-owned and private capex announcements declined in the September quarter, the contraction was much starker in the public sector. In the June quarter, the worth of public sector announcements had shrunk nearly 5%, but this widened to 68% in the just-ended quarter. Private sector firms continued to tread with caution, with over 55% sequential decline.

“There has been a slower growth in the last few months especially in the manufacturing space in terms of project announcements, but if we look at a three-year growth, we also notice an improvement in private capex. But it may not be enough to assume that we are back in a capex upcycle,” Arora said.

The sentiment weakened across sectors: project announcements in the services (other than financials) segment fell the most, around 93.4% sequentially. This was followed by an 85.4% decline in mining and 83.2% drop in construction and real estate. New proposals have seen a broad-based decline over the past few quarters, with an unusual spurt in the March quarter.

The pace of project completions also fell sharply in the September quarter. The worth of projects that got completed was lower by 72.3% sequentially after a spurt in the preceding quarter. Projects worth ₹2.2 trillion were completed during the last three months against ₹7.9 trillion in the June-ended quarter. This was the first sequential decline in the value of projects being completed in the last four quarters.