Low inflation: capex cycle looks poised for an uptick


Low inflation: capex cycle looks poised for an uptick

Official data released Monday showed that the wholesale price inflation rate in April went into negative territory; it fell by almost a percentage point over April 2022. This is the lowest WPI inflation print in the past 34 months and comes close on the heels of retail inflation moderating sharply. Clearly, price pressures have started to ease in the economy.

This may not just boost consumption demand but also could be the last trigger needed for India to witness a broad-based recovery in capital expenditure, especially in the private sector. To be sure, over the past five years, the government’s broader strategy has been to incentivise a recovery of private sector investment sentiment as the main channel for economic growth.

To this end, the government has provided a whole host of policy incentives such as a historic cut in corporate tax rate and production-linked incentives while continuing to ramp up its own capital expenditure to historic levels. The end result was a dampening of animal spirits in the private sector. But with inflation moderating and the RBI already showing signs of an extended pause on monetary tightening, The Indian Express writes “it can be said that the domestic economy looks primed for take off.

"There are several reasons why this may happen. For one, Indian banks are considerably healthier; their capital adequacy ratio is close to an all-time high….

“Taken together, these two factors will boost the risk appetite for new investments. And there are initial signs that this is happening. Credit growth is close to pre-pandemic highs and new project announcements by the private sector by the end of March were 150 per cent above the pre-pandemic levels.

“Similarly, as a report from Jefferies equity research points out, the flow orders to industry companies have also witnessed more than 15 per cent growth (year on year) from the pre-pandemic lows of 5 per cent. Another key metric that signals a turnaround in the private capex cycle is the capacity utilisation level — at 73 per cent it is above the historical average and suggests that India is on the brink of a new phase of the capex cycle.”

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