ICRA expects capacity utilisation (CU) to reach the critical threshold of 75% required to trigger broad-based capacity expansion, only by the end of CY2022. Moreover, the rating agency highlighted that while some green shoots are visible in private investments, protracted geopolitical tensions and elevated commodity prices could constrain the profitability of the corporate sector, imparting some caution to private sector capex in the immediate term. In such a scenario, Government capex, especially by the states, will be critical to support investment demand and boost economic activity over the next two-three quarters.
Ms. Aditi Nayar, Chief Economist, ICRA Ltd said: “ICRA expects CU to remain steady at 72-73% in Q4 FY2022, before dipping in Q1 FY2023, reflecting seasonal trends, as well as the impact of higher commodity prices and a revival in contact-intensive services on the demand for goods. However, higher exports to fill global supply gaps would moderate the dip. Thereafter, we expect CU to rise gradually to 74-75% in Q3 FY2023, reaching the threshold for broad-based capacity expansion to be undertaken by the private sector. At present, expansion is being announced, but in a narrower set of sectors such as power and metals, and in sectors related to the PLI schemes.”
CU had recovered to 72.4% in Q3 FY2022 from 68.3% in Q2 FY2022, exceeding the pre-pandemic level (69.9% in Q4 FY2020). Business sentiments waned thereafter in Q4 FY2022, reflecting the uncertainty triggered by the Russia-Ukraine conflict, and the improvement in the current quarter would be contingent on how soon the tensions de-escalate.
Nevertheless, private sector project announcements touched a 11-year high in FY2022, suggesting early signs of a pick-up in private sector investment activity, which is an encouraging sign. ICRA noted that a majority of investment-related indicators witnessed an uptick in YoY growth in Jan-Feb 2022 relative to Q3 FY2023, suggesting that investment demand is likely to have improved in Q4 FY2022. Moreover, eight of the 10 investment-related indicators recorded a growth in Jan-Feb 2022 relative to the same months in FY2019, with as many as six indicators witnessing an improved growth performance compared to Q3 FY2022, relative to the respective pre-Covid levels of FY2019.
“While the green shoots in private investments are a positive, protracted geopolitical tensions and elevated commodity prices could constrain the profitability of the corporate sector, thereby imparting some caution to private sector capex in the immediate term. In such a scenario, Government capex remains critical to support investment demand,” said Ms. Nayar.
“Given that the Rs. 1.0 trillion special assistance loan for capital investment to the state governments accounts for the bulk of the increase in the GoI’s budgeted capex in FY2023, the onus to boost capex aggressively lies with the states. Moreover, following the higher-than-estimated tax devolution in Q4 FY2022, we estimate the amount of devolution in FY2023 to exceed the level budgeted by the GoI by ~Rs. 1.1 trillion. An early release of this upside could encourage the states to boost capex, which is urgently required to support economic growth amidst the geopolitical uncertainties,” added Ms. Nayar.
The GoI released Rs. 4.5 trillion to the states as tax devolution between April-December 2021. Subsequently, a massive Rs. 4.3 trillion was devolved to the states in Q4 FY2022, including some arrears for the earlier periods, nearly rivalling the amount released in the previous nine months. Overall, the devolution in FY2022 exceeded the budget estimates for that year by a considerable Rs. 2.2 trillion. Given the lead time required to plan and execute projects, this back-ended upside may not have translated into higher capex in that quarter.
The investment-related indicators tracked by ICRA are infrastructure and construction goods output, capital goods output, cement production, finished steel consumption, CV registrations, infrastructure credit by SCBs, the GoI and states’ capex, states’ stamp duty collections and engineering goods exports and imports.