Private investment capital expenditure growth in India remains strong, registering a compound annual growth rate (CAGR) of 19.8% from fiscal year 2021 to fiscal year 2025, according to the report.

Unleashing the Indian Growth Engine: A Deep Dive into Capital Expenditure Trends

Bustling Delhi: Over the last five years, the private sector has been an Asian tiger, churning out a robust 19.8% compound annual growth rate (CAGR) in capital expenditure (capex), a report by HDFC Securities reveals. But this impressive growth hasn't translated into a commensurate boost for the banking sector's credit growth — almost the entire investment has been bankrolled by stellar cash flows from operations, leaving banks out in the cold.

Peeling back the layers, the report points out that the top 250 private companies upped their capex game from ₹4,833 billion in FY21 to a staggering ₹8,426 billion in FY24, projecting ₹9,951 billion in FY25E, marking a CAGR of 19.8%. Key drivers of this growth wave have been the oil and gas, power, automobiles, and commodities industries.

Meanwhile, the central government's capital expenditure (capex) skyrocketed from ₹4,263 billion in FY21 to an eye-popping ₹10,184 billion in FY25E, representing a CAGR of 24.3%. Major engines of this growth were ministries related to road transport, railways, defense, and capex-related transfers to states.

However, state government capex has been a laggard, growing from ₹4,223 billion in FY21 albeit at a slower pace, clocking a CAGR of 11.9% over the period. Despite registering a 28%, 11%, and 26% increase in the following three years, it dipped by a sharp 20% year-on-year so far in FY25E, reaching ₹6,075 billion (as of Feb 2025). Major contributors to this growth have been states like Uttar Pradesh, Maharashtra, Madhya Pradesh, Tamil Nadu, Gujarat, and Odisha.

An intriguing tidbit from the report highlights that the top 250 non-BFSI private companies have invested ₹29.6 trillion on capex between FY20 and FY24, accounting for just around 57% of their total cash flow from operations (₹52.7 trillion) during the same period. This suggests a solid iron rice bowl of internal resources and surplus cash, allowing companies to pursue their investment schemes without shouldering excessive debt.

The Enigma of Private Capex

Why the Robust Growth?- Defining moments like the "Make in India" campaign, which waterskied foreign direct investment (FDI) policies and facilitated investment in manufacturing and infrastructure, have been key contributors to the growth spurt[4].- India's economy, averaging 6-7% GDP growth annually, has provided a fertile ground for investments[2].- The government's emphasis on infrastructure development has opened doors for private-sector participation, particularly in projects like highways, railways, and urban development[4].- Regulatory refining and easing compliance have made the business landscape a breeze to navigate[2].

Banking on Growth — But at What Cost?

New Opportunities: The increase in private capex has sparked credit demand, which has stimulated the banking sector with a rise in lending[1].
Watch Out for the Bumps: This bull run in lending can present perils for banks, especially if investment projects falter and default becomes a looming reality[1].

The Government — Complement or Competitor?

Partners in Crime: The government has served as a supportive partner in the capex dance by providing necessary infrastructure and regulatory frameworks, nurturing a propitious environment for private investments[2].
The Race for Resources: The government's competition for capital to finance its own projects may squeeze the private sector and inflate costs and interest rates across the economy[2].

Crafting a stable and thriving Indian economy demands a steady, cautious hand when managing both private and government capex, ensuring that both the banking system and the broader economy stay on an even keel.

In the context of India's economy, the robust growth in capital expenditure (capex) among the top 250 private companies has been strongly influenced by sectors like oil and gas, power, automobiles, and commodities, providing ample opportunities for investing in these industries.
As the banking sector experiences an increase in lending due to the rise in private capex, it's crucial to navigate potential pitfalls, such as the risk of investment projects faltering and leading to defaults, which could have significant implications for the banking system.

Private investment capital expenditure growth in India remains strong, registering a compound annual growth rate (CAGR) of 19.8% from fiscal year 2021 to fiscal year 2025, according to the report.