Indian business looks to Modi to spark capex revival

March 23, 2014 7:31 am

Indian business looks to Modi to spark capex revival

By James Crabtree in Mumbai

India’s opinion polls put opposition leader Narendra Modi as the country’s next prime minister, shortly after election results are announced on May 16. But will India’s corporate sector, enthused by the arrival of a new government headed by a self-described business-friendly leader, then begin investing once again?

Capital expenditure levels have plunged in Asia’s third-largest economy over the past two years, as growth slowed. New private sector project announcements, an important indicator of future capex, fell to their lowest ever level in the third quarter of this financial year, down roughly by half compared with the same period the year before, according to research from Citi.

Yet India’s recent stock market rally, in which shares hit another record last week is partly based on hopes that this trend will soon reverse post-election, assuming that Mr Modi’s centre-right Bharatiya Janata party wins.

India’s business leaders tend to blame political factors for their country’s capex drop off. The incumbent Congress-led government has made industrial investment especially difficult, the argument runs, with myriad administrative delays and bureaucratic hurdles.

“Large capital expenditure is not coming now,” says Harsh Goenka, chairman of RPG Enterprises, a major infrastructure and manufacturing conglomerate. “Most Indian and international companies are taking a wait and watch approach. Decisions will be taken in June.”

On this view, a stronger government with more capable leadership will help to restart stalled private sector investment projects, many of which have been held back by regulatory restrictions, kicking off a mini building boom in everything from roads to steel mills. Confidence will return: India’s industrial giants will rediscover their animal spirits, in turn launching further new projects.

Such hopes have seen previously unfancied companies in downtrodden sectors such as capital goods enjoy heady recent stock price increases: Larsen & Toubro, India’s largest infrastructure company by sales, is up 18 per cent over the past month, for instance. RPG’s Mr Goenka believes that at least some of this optimism is warranted: “I think if the BJP comes in with a clear majority, then a lot of investment will come fairly quickly,” he says.

Others, however, are more sceptical, including Neelkanth Mishra, Credit Suisse’s respected Mumbai-based India equity strategist, who described pre-election excitement about a future spending boom as “unjustified” in a note last week.

“We disagree with the consensus view that elections can revive the investment cycle,” Mr Mishra wrote. “Only a fourth of projects are stuck with the central government, and two-thirds of these are in power and steel, both wracked with massive overcapacity . . . Only state governments can revive power demand. Even elsewhere [roads, railways, etc], solutions will take years.”

Neither is it clear that India’s largest companies are engaging in boardroom preparations for a post-election ramp-up, in spite of the fact that most industrialists, at least in private, agree that Mr Modi is likely to prevail.

“I haven’t had a conversation with anyone at all saying ‘I am now going to build that car plant that I was planning and had delayed’, or anything at all of that sort,” says one senior investment banker at a global financial institution in Mumbai, who spoke on condition of anonymity.

The reasons are not hard to judge. India’s private sector debt levels have more than doubled to about 70 per cent of gross domestic product over the past decade. Many companies in sectors such as infrastructure are badly overleveraged, raising considerable doubts about their ability to begin investing, whoever emerges in power in New Delhi.

Levels of bad debts continue to rise in the financial system as well, and will continue to do so for the next few years at least, according to projections from Morgan Stanley. Neither India’s tycoons nor its bankers, in short, are in the kind of financial shape to begin a flurry of spending, especially as the Reserve Bank of India is unlikely to cut interest rates quickly in the near future.

Ultimately, even were Mr Modi to prevail, he therefore faces not simply the task of governing with basic competence, but also of persuading bruised Indian companies in sectors ranging from telecoms to steel and mining that their country is once again a safe place to invest, after many years of damaging obstacles and setbacks.

“Even the relatively well capitalised big Indian companies such as Tata and Mahindra are increasingly looking abroad to places such as Africa for growth,” the investment banker says. “So the real task for Modi is to refocus Indian business on India itself, to make India attractive again. Only then will the investment start, and it could take a while.”