India Set for Capex Boost as Domestic Demand Grows: CII

Private capital expenditure (capex) by Indian companies is likely to see a notable rise in the near term, driven by strong domestic demand despite facing external challenges like a weak global environment and rising shipping costs. This optimistic outlook comes from a recent survey conducted by the Confederation of Indian Industry (CII) among over 200 firms of varying sizes, offering insights into the business confidence and investment plans of India Inc.

Business Confidence on the Rise
CII’s Business Confidence Index for the second quarter of FY25 (July-September) reached a robust 68.2, marking its highest point since March 2024. This is a notable uptick from the previous quarter’s 67.3 and a further improvement from the 67.1 recorded in the same quarter last year (Q2 FY24). The index reflects the sentiment of businesses across sectors, underlining the growing optimism despite ongoing concerns in the global economy, including geopolitical risks and slower-than-expected recovery in some international markets.

According to the survey, improving domestic demand is seen as the primary driver of this optimistic environment, with companies expressing renewed confidence in expanding their investments. “Improvement in domestic demand has created a more optimistic business environment, encouraging companies to invest and expand,” the survey noted.

Private Capex Expected to Rise
One of the standout findings from the survey is that 59% of the respondents anticipate an increase in private capital expenditure during April to September 2024 compared to the previous six months. This rise in capex is a positive indicator for future economic growth, as it reflects businesses’ willingness to invest in expanding their capacity, innovating, and responding to the heightened demand in the market.

Moreover, the survey revealed that a significant portion of respondents expect the trajectory of private capex to remain unchanged for the first half of the fiscal year, with only 6% anticipating a decline in their investment levels compared to the second half of FY24. This indicates that while the global outlook may remain subdued, domestic factors like strong consumer demand and sectoral growth are pushing companies to continue investing.

Inflation and Interest Rates Outlook
Inflation expectations are another critical factor shaping business sentiment. The survey shows that 78% of respondents believe inflation this year will remain below 5%, reflecting optimism about price stability, which is crucial for sustaining demand. Within this group, 33% of firms expect inflation to hover between 4.5% and 5%, while 35% see it slightly lower, in the range of 4% to 4.5%. These expectations are aligned with the Reserve Bank of India’s (RBI) inflation projection of 4.5% for the year.

In addition, more than 60% of the survey respondents anticipate that the RBI will begin a rate-cutting cycle within this fiscal year. Of these, 34% expect the central bank to initiate rate cuts in the October-December quarter, while another 31% foresee it happening during the January-March quarter of 2025. With banking liquidity in surplus, some companies believe that the central bank may ease interest rates or at least signal a policy shift in the upcoming monetary policy review.

Capacity Utilization on the Upswing
Driven by improving domestic demand, especially from rural India, companies have reported stronger capacity utilization levels. According to the survey, 46% of the respondents stated that their capacity utilization levels ranged between 75% and 100% during the April-June period, with an additional 6% operating above 100%. This marks an improvement from the previous quarter, when only 45% of companies reported capacity utilization in the same range.

As businesses operate closer to full capacity, it further reinforces the need for increased private capex to enhance production capabilities and meet rising demand, particularly in sectors experiencing higher consumption from rural markets and infrastructure development.

Profitability and Employment Prospects
The survey also highlights a favorable outlook on profitability, with 45% of companies expecting their profits to improve in the July-September quarter, slightly up from 42% in the previous quarter. This optimistic profitability forecast ties in with the expectations for increased capex and capacity expansion, as companies look to leverage favorable market conditions to improve margins.

On the employment front, the survey indicates a marginal improvement. Around 49% of companies reported an improvement in their employment situation during the quarter, while 41% said there was no change. This suggests that while employment opportunities may rise, the gains are expected to be moderate.

International Investment Plans Remain Cautious
Despite the encouraging domestic scenario, companies remain cautious about international investments, reflecting concerns over global uncertainties. The survey revealed that 40% of firms expect their international investment plans to remain unchanged, underscoring the cautious approach of businesses amid rising geopolitical tensions, trade disruptions, and slowing demand in key export markets.

Conclusion
The CII survey paints a promising picture for India Inc.’s private capital expenditure, with strong domestic demand driving business confidence and capacity expansion. While external challenges persist, Indian companies are betting on a favorable domestic environment, bolstered by stable inflation expectations, potential rate cuts, and rising profitability. However, international expansion plans remain muted as firms navigate the complexities of the global economic landscape.

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