Elections eye: Can capital receive greater assurance that the government will survive?

 Elections eye: Can capital receive greater assurance that the government will survive?

Although the market is positive about the findings, experts believe it is too soon to detect any significant changes in the patterns of capital expenditure.

The market is feeling optimistic after recent election outcomes in Madhya Pradesh, Rajasthan, and Chhattisgarh. Prior to general elections, firms usually reduce their expenditure on private capital. Nonetheless, brokerages such as Jefferies think that the current results can boost market sentiment because of the government's stability. Will private capital rise quickly as a result of this?

Where is the money spent on private capital?

Prior to examining the possible effects, it's critical to comprehend the capital expenditure situation as it is now. Over the last twelve months, capital expenditure by listed corporates and states has accelerated, growing by 17 per cent year-on-year and Rs 7.1 trillion (34 per cent) to an unprecedented Rs 8.1 trillion, according to an ICICI Securities report dated December 11. level has been attained. increase year over year), correspondingly. This is different from the FY2022 and FY2023 cycles, when domestic and central government real estate investments predominated. According to the research, the capital expenditure cycle's motors are all firing right now.

In a recent research, analysts at Incred Equities made the prediction that the energy industry's shift to renewable energy, electric vehicles (EVs), battery technology, and hydrogen would propel higher private sector expenditure. The general elections may keep new government investments muted for the time being, but the China+1 strategy and the production-linked incentive (PLI) program should propel industry capital spending upward. The manufacturing sector's capacity utilization is still higher than the long-term average, according to the study.

opposing viewpoint

Even with the market's confidence, not everyone anticipates a rise in capital expenditures from the private sector. According to Rashesh Shah, chairman of Edelweiss Group, companies are today more likely to pursue mergers and acquisitions (M&A) and brownfield growth in order to generate rapid profits. Corporates are anticipated to take some time to embrace large greenfield growth, as they are still wary of their historically high debt levels. Shah underlined that if M&A and brownfield capital investment prospects decline, the shift can occur within the next 18 months.

A decline in consumption?

According to Saurabh Mukherjee of Marcelius Investment Managers, who spoke with Moneycontrol recently, the private sector outlook is dubious since India's middle class—which ought to be spearheading the country's spending story—is having difficulties. Lower-class families' and the middle class's consumption have both somewhat decreased during the last 12 months.

Although there has been a little slowdown in spending, according to Amit Kumar, Deputy VP of Institutional Research at HDFC Securities, India's overall consumption narrative is still intact. Certain factors influence individual consumption. One is the rural region, which is still recovering from the COVID-19 pandemic. A few organizations have said that they believe there are promising opportunities that will materialize in the next quarters. Thus, it is a category," he clarifies, adding that although total spending is slowing down, this is not a big deal and that short-term consumer headwinds shouldn't significantly affect private enterprises' plans.

"Our per capita income in rural areas is $1,800, and it has surpassed $2,400 in India." Thus, this is when people begin to consume, and there is a sizable middle class population in India, according to Kumar. "I don't believe that India's consumption will be a problem. While certain industries could be slowing down, overall consumption shouldn't be a problem.

According to a new analysis by HDFC Mutual Fund, a number of variables, including rising rural salaries, more optimistic crop forecasts, reduced inflation, and encouraging signs of urban demand, such rising car sales, are all supportive of further rise in consumption.

fresh regions and consistent expansion

Even while there is some doubt over the rate of expansion of private capital expenditure, according to a number of market specialists Moneycontrol talked with, growth and opportunities are proportional, and significant increases or declines are not anticipated.

One recurring element that was previously mentioned was a change in the industries and fields that are influencing private capital spending. Analysts claim that while capital expenditures are still being made in commodity-intensive industries like steel, electricity, cement, and so on, the industries making announcements about capacity development are the manufacturing sectors. This time around, according to Kumar, new technological advancements should be a major factor. He acknowledges that there has been significant capital spending in the PLI-focused industries.

food items, electronics, and a small amount of the pharmaceutical and car industries.

Other important markets, which make up a significant portion of the anticipated capex, such batteries, electric cars, and semiconductors, have not advanced as quickly. This is a result of the required technical improvements and developments rather than a loss of faith in the balance sheet or the economy. It's not halted, although it could have been a little bit slower. I believe that's a huge victory, even if it takes two to three years as opposed to one or two years," he states.

Amit Anwani, chief analyst at Prabhudas Lilladher, shares this opinion and emphasizes how slowly capital spending is happening. "In terms of capital expenditure, I believe that companies are proceeding as anticipated," he states.