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Who’s driving India’s capital spending? Government and Reliance Industries

Reading S&P report, ‘India’s Private Sector Companies Adopt Wait-And-See Approach to Capital Spending’ raises concerns for Make In India, a few shreds of hope notwithstanding.

* We expect capital spending in India will continue to fall in fiscal 2016 despite its economy being one of the few bright spots in Asia-Pacific

* Corporates in capital-intensive sectors are mostly focusing on improving profitability and lowering leverage than looking at new projects

* We expect government-owned companies and Reliance Industries to lead capital spending before a broader-based pickup occurs

* Capital spending will start to recover in fiscal 2017 after companies benefit from improvements in the economy and government reforms

* The pace of recovery in performance and capital spending will determine future credit trends in Indian corporates

While investments are a necessary, but not sufficient, condition for economic growth, the report states that India’s private companies are looking at the idea the other way round:

We believe the private sector’s capital spending will eventually make a comeback in fiscal 2017 after overall improvements in the operating environment, such as higher economic growth, lower cost of borrowing, and ease of implementing new projects.

Worse follows:

We believe capital spending by the top Indian corporates will further decline by 10%-15% in fiscal 2016 from its peak in fiscal 2014. This is because the companies have yet to materially benefit from the government reforms or from an improvement in the Indian economy. Interest rates were high until last year and the global economic environment is also not rosy.

So, what happens to growth and employment drivers in the interim? It leans on the government, through its public sector entities:

…the country’s public sector has continued with its heightened pace of capital expenditure. Many of these government-owned companies have a well-protected competitive position, either due to regulatory or legacy reasons, and good financial position with better access to banks and financial markets to fund their investments. This is evident from the spending by companies such as ONGC, NTPC Ltd., and Power Grid Corp. of India Ltd., which together account for two-thirds of public sector spending among top 100 corporates. In certain cases, the heightened pace of capital spending by the public sector also reflects the lengthy decision-making process and gradual capital spending, which does not change quickly to suit market conditions.

Is it all dark on the Indian private sector front? Broadly, yes. But two exceptions prove the rule, one of them partly:

Some of the spending by the private sector and, to a much lesser extent, the public sector is outside India. For example, we expect Tata Motors to increase its capital spending. But it is mostly because of the planned spending by its Jaguar Land Rover business, which accounts for over 90% of the consolidated capital expenditure.

Which leaves just one major private company that’s carrying on with investments in India: Reliance Industries Ltd.

The decline in India’s private sector spending would have started in fiscal 2014 if it were not for Reliance Industries. The company doubled its capital spending in fiscal 2014 to Rs 600 billion and accounted for about 25% of the private sector’s capital spending. It is also the reason why, despite our expectation of a fall, we believe private sector capital spending will remain materially higher than public sector spending among the top Indian corporates. Reliance Industries has embarked on a large capital spending program of about $30 billion over three years, mainly on refining, petrochemical, and the telecom sector.

In the telecom sector alone, Reliance Industries plans to create 140,000 jobs on investments of Rs 70,000 crore. As the company’s chairman and managing director Mukesh Ambani said in his June 18, 2014 speech:

The year 2015 will see the phased launch of Reliance Jio across India.

The fruits of the tremendous value created by this Rs 70,000 crore initiative would start to flow.

Engaged in this massive endeavour are over 10,000 full time Jio employees working alongside nearly 30,000 professionals from our partners and vendors from all parts of the world.

In addition, there are over 100,000 people working across the country in creating the digital infrastructure backbone for this network.

Beyond Reliance Industries, however, the private sector, despite being optimistic about the new government and its open, transparent policies — the spectrum and mining auctions, for instance — is in a cautious mode.

Indian companies will be watching closely the government’s progress on addressing the issues faced by capital-intensive sectors, such as utilities, infrastructure, and metals and mining, in implementing new projects. Companies will need to be confident that their projects are not going to suffer because of the same issues. They have already burnt their fingers once.

In terms of relative capital spending, however, S&P says India is in a better position than China and ASEAN companies. “We believe capital spending growth may ease somewhat among top Chinese and ASEAN corporates for the next one to two years but we do not expect overall capital spending to decline like in India.”

Clearly, for growth, return on investment and jobs, India will need to lean on the public sector till 2017 — if the Indian private sector is in a wait and see mode, to expect private foreign capital to come in and invest is crossing the limits of optimism.

Disclosure: The author is New Media Director of Reliance Industries Ltd

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