India’s Capex Engine is Revving Up, Says Axis Capital Report

Mumbai / October 4, 2024: Axis Capital expects house construction, power and new investment areas to fuel a rebound in the investment ratio to 34% by FY30 (+3.6pp above FY24). In a new report flagging the beginning of a new capex cycle, the team, led by strategist Neelkanth Mishra, stresses the importance of real estate in India’s economic cycles, as it drove 5pp of the 7pp decline in investment-to-GDP ratio over 2012-21, a statement from Axis Capital said. 

Investment Activity Slowdown Driven by Real Estate and Power Generation Between 2012 and 2021

Between 2012 and 2021, the slowdown in investment activity was primarily driven by the real estate and power generation sectors. Of the 7 percentage points decline in investment-to-GDP, 5 percentage points were attributed to household spending on real estate, while over 3 percentage points stemmed from capital expenditures on machinery for utilities and manufacturing. This decline was partially offset by increased capital expenditures on dwellings and information technology/software. The decrease in manufacturing capital expenditure as a percentage of GDP was largely due to inputs related to real estate, such as metals, construction materials, and machinery. Urban real estate, which represents two-thirds of the total construction value, is particularly susceptible to inventory cycles, whereas rural residential real estate is less affected by such fluctuations. Additionally, excessive power capacity additions between 2012 and 2016 contributed to the subsequent decline in capital expenditure.

Strong Structural Drivers Propel Real Estate Growth and Capital Expenditure in India

Real estate is supported by several structural demand drivers, including a growing population, decreasing household sizes, urbanization, the increasing need for built-up area per capita, and improving construction quality. As a result, strong demand for construction materials, particularly steel, cement, and machinery, is anticipated. This demand will be driven by cyclicality, as low inventory levels following a decline in construction from 2012 to 2021 set the stage for robust growth in dwelling construction, including commercial real estate. The report predicts significant capital expenditure growth in power generation, estimating an investment of Rs 19 trillion over FY24-30E, with Rs 10 trillion allocated to renewables (excluding hydro). Additionally, investments in transmission and distribution capacity are expected to rise. The authors also foresee emerging investment areas such as green hydrogen, defense, solar modules, robotics, data centers, and energy storage contributing an additional 60-80 basis points to India’s investment ratio, the statement said.

Challenges to further growth acceleration can limit upside to capex

As companies make investment decisions based on their growth expectations, the overall growth rate significantly influences the investment-to-GDP ratio. The authors project that trend growth will not exceed 7-7.5%, which should be enough to elevate the investment ratio to 34%, representing an increase of 3.6 percentage points above FY24, with 1.8 percentage points of improvement expected from both households and corporations. They believe that the current near-term slowdown is temporary, resulting from unintentional fiscal and monetary tightening, the statement added. 

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