“Are there prospects for the capex cycle in the medium term? The answer is yes,” he said. “Last decade was somewhat disappointing or sluggish for capital formation because of balance sheet stress in the banking sector and non-financial corporate sector. If you look at the non-financial corporate sector, in general during the second decade there was a reduction in leverage ratio, that means balance sheets are capable of expanding again based on corporate profitability. Capacity utilisation is also reaching the levels which in the past have triggered capex.
According to an RBI survey, seasonally adjusted capacity utilisation of the manufacturing sector improved from 73% in the March 2022 quarter to 74.3% in the June quarter, its highest level in three years.
Nageswaran also said that the revival of the capex is being aided by the improving banking sector balance sheet and the strong capital buffers created by the banking system.
“This (higher household income and consumption) should not necessarily come in the way of banks’ profitability because volume growth is pretty strong and interest rates for lenders are not very constrictive,” Nageswaran said. “We may be entering a fairly comfortable Goldilocks zone in terms of the interest rates charged to borrowers and rates paid on deposits. So credit growth momentum is holding up quite well.”
ET had earlier reported that there is a turnaround in fresh capital investment by corporates with bank loan demand being led by infrastructure, roads, renewable energy, and oil sectors. While in the last few quarters, loan demand was led by higher utilisation of working capital due to increase in commodity prices, from the September quarter onwards corporate loan growth has trended towards fresh capacity building, experts point out.
Nageswaran cautioned about India’s export growth outlook and said that domestic consumption will propel demand.
“We need to be cautious of the export outlook for us in the coming years and concentrate on the internal drivers of demand,” he said. “However, internal drivers of demand are looking constructive and positive, resilient, reinvigorated investment cycle, stable financial system and structural reforms are paving the way for medium term growth to continue. The digital infrastructure built over the last 8 years will also support business growth.”