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Broad-based revival in private capital expenditure soon: TV Narendran

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Broad-based revival in private capital expenditure soon: TV Narendran

The economy is poised to witness a broad-based revival in the long-elusive private capex, led by sectors like metals, mining, chemicals and electronics where investments have already started to pick up, TV Narendran, president of the Confederation of Indian Industry, told FE in an interview.

He asserted that any rise in interest rates is unlikely to bridle India Inc’s expansion plans, as companies in the capital-intensive sectors have deleveraged substantially in recent years. “So, even if the interest rate goes up, companies’ borrowing costs, in absolute terms, are down from the earlier levels because of smaller debt. So, capital-intensive industries are better positioned to invest,” Narendran said. Many analysts expect the central bank to raise the interest rates in June to curb retail inflation, which scaled a 17-month peak of 6.95% in March.

The employment prospect, too, has brightened, because companies have not just started hiring in a big way but they are willing to pay more for talent, Narendran said, adding that some of the sectors are facing an attrition issue. In fact, companies in sectors like hospitality will likely find it difficult to again draw workers, who lost their jobs due to the pandemic and are now employed in other sectors.

While inflation — caused by a spike in oil and food prices in the wake of the Russia-Ukraine conflict — is denting the household budget, rural producers are getting good price for their produce. “So, a part of the inflationary impact is actually spurring consumption and investment. If the rural economy does better, it’s good because after the second Covid wave, the recovery in (private) consumption was worse than the recovery in investment…. If the commodity prices are high, then commodity producers will invest as well,” Narendran said.

According to the second advance estimate for FY22, while private final consumption expenditure is expected to rise by 4.8%, gross fixed capital formation in FY22 will likely grow 14.6%, albeit on a contracted base.

Narendran said the surge in inputs costs has certainly been a “matter of concern” for businesses. However, while there is a short-term hit on margin, companies are bullish about growth and export prospects in the medium-to-long term. Citing a CEO poll conducted by the CII in March (after the Ukraine war broke out), Narendran said: “Most of them are going to do more capex than they did in the previous year and they are also hiring more than what they did in the previous year.”

According to a Crisil report this month, corporate profitability, or the average Ebitda margin, may have dropped by 200-300 basis points (bps) on year and 40-60 bps sequentially in the fourth quarter of FY22. This is based on Crisil’s analysis of over 300 companies (excluding those in the financial services, and oil and gas sectors). It marks the second year-on-year decline in Ebitda in 12 quarters.

Commenting on the rise in steel prices following a spike in input rates, Narendran, who is also MD of Tata Steel, said companies have been mostly able to pass on the cost surge to downstream consumers, as imported steel is more expensive than local steel. The price of steel has mainly been influenced by the surge in coking coal prices. “I think steel companies keep adjusting the prices, depending on demand-supply balance and input costs. And, of course, they have an option to export,” he said.

Steel prices in Europe are much higher than in India. Of course, the EU has fixed quotas for its imports, which typically limit the volume of despatches to the bloc. Still, Indian companies have an option to export to recover their costs (on account of high input prices) if they find it difficult to do so by selling in the domestic market, he said.

Narendran conceded that exporters to and importers from Russia are struggling to cope with the impact of the war but the crisis has also opened up fresh opportunities for Indian suppliers. For instance, India is now looking to fill in a global shortage in wheat supplies due to the war (both Russia and Ukraine have been major exporters of the commodity).

He, however, discounted fears of a massive disruption in the supply chain due to localised lockdowns in China. As of now, only a few segments may have faced issues, but industry, as a whole, remains broadly unaffected.

 
   

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