The Shifting Sands of Private Capex in India – A Deep Dive into Britannia and Bharti Airtel’s Capex Cutbacks.

The Indian economy, often hailed as one of the fastest-growing in the world, is at a critical juncture. The recent decision by two corporate giants, Britannia and Bharti Airtel, to scale back their capital expenditure (capex) plans for the new financial year has sparked a debate about the state of private investment in the country. Despite the Reserve Bank of India (RBI) cutting interest rates to historic lows, private capex seems to be losing steam. This editorial delves into the reasons behind this shift, its implications for the Indian economy, and what policymakers can do to reignite private investment.

The Capex Conundrum: Britannia and Bharti Airtel’s Strategic Retreat

Britannia, one of India’s leading FMCG companies, and Bharti Airtel, a telecom behemoth, have both announced a reduction in their capex plans for the upcoming financial year. Britannia’s decision to cut back on its expansion plans comes at a time when the FMCG sector is grappling with rising input costs and subdued rural demand. On the other hand, Bharti Airtel’s capex reduction follows years of aggressive investment in 5G infrastructure and spectrum acquisition, which has left the company with a hefty debt burden.

The scaling back of capex by these two industry leaders is indicative of a broader trend in the Indian corporate sector. Despite the RBI’s efforts to stimulate investment by lowering interest rates, private capex has failed to pick up momentum. This raises an important question: Why is private investment losing steam, even in a low-interest-rate environment?

The RBI’s Rate Cuts: A Double-Edged Sword?

The RBI has been proactive in cutting interest rates to boost economic growth. Since the onset of the COVID-19 pandemic, the central bank has slashed the repo rate by a cumulative 250 basis points, bringing it down to 4%. The logic behind these rate cuts is simple: lower borrowing costs should encourage businesses to invest in expansion, thereby driving economic growth.

However, the relationship between interest rates and private capex is not as straightforward as it seems. While lower interest rates reduce the cost of capital, they do not necessarily translate into higher investment if other factors are at play. In the case of India, several structural and cyclical issues are dampening the appetite for private capex.

Structural Bottlenecks: The Hidden Barriers to Private Investment

One of the primary reasons for the subdued private capex is the presence of structural bottlenecks in the Indian economy. These include:

1. Weak Demand: Despite the RBI’s efforts to stimulate growth, consumer demand remains tepid. The FMCG sector, for instance, has been hit hard by weak rural demand, which accounts for a significant portion of its sales. Similarly, the telecom sector is facing saturation, with limited scope for revenue growth in a highly competitive market.
2. High Debt Levels: Many Indian companies, including Bharti Airtel, are burdened with high levels of debt. This limits their ability to undertake new investments, even if borrowing costs are low. The telecom sector, in particular, has been grappling with the financial fallout of the 2016 Reliance Jio price war, which forced companies to take on massive debt to stay afloat.
3. Policy Uncertainty: Frequent changes in government policies, especially in sectors like telecom and agriculture, have created an environment of uncertainty. This discourages companies from making long-term investment commitments.
4. Infrastructure Deficits: India’s infrastructure deficits, particularly in areas like logistics and power, increase the cost of doing business. This acts as a disincentive for companies to invest in capacity expansion.

Cyclical Factors: The Post-Pandemic Hangover

The COVID-19 pandemic has left a lasting impact on the Indian economy, and its effects are still being felt. Some of the cyclical factors contributing to the slowdown in private capex include:

1. Supply Chain Disruptions: The pandemic disrupted global supply chains, leading to shortages of critical inputs and raw materials. This has forced companies to rethink their expansion plans.
2. Labor Market Challenges: The pandemic-induced lockdowns led to widespread job losses and a decline in household incomes. This has had a knock-on effect on consumer demand, further dampening the outlook for private investment.
3. Global Economic Uncertainty: The ongoing geopolitical tensions, including the Russia-Ukraine war and the US-China trade war, have created a climate of global economic uncertainty. This has made companies cautious about committing to large-scale investments.

The Role of Public Capex: A Silver Lining?

While private capex has been sluggish, the Indian government has stepped up its public capex efforts to fill the void. In the Union Budget 2023-24, the government announced a 33% increase in capital expenditure, allocating a record ₹10 lakh crore for infrastructure development. This is expected to have a multiplier effect on the economy, creating demand for goods and services and providing a fillip to private investment in the medium to long term.

However, public capex alone cannot sustain economic growth. For India to achieve its ambition of becoming a $5 trillion economy, private investment must play a pivotal role. The government’s efforts to boost infrastructure spending are a step in the right direction, but more needs to be done to address the structural and cyclical issues plaguing private capex.

Policy Recommendations: Reigniting Private Capex

To revive private investment, policymakers need to adopt a multi-pronged approach that addresses both the demand and supply-side challenges. Some of the key measures that can be taken include:

1. Boosting Consumer Demand: The government should focus on measures to boost consumer demand, particularly in rural areas. This could include increasing spending on rural infrastructure, providing income support to farmers, and implementing policies to create jobs.
2. Reducing Policy Uncertainty: The government should strive to create a stable policy environment that encourages long-term investment. This could involve consulting with industry stakeholders before making major policy changes and providing clarity on issues like taxation and regulation.
3. Easing the Debt Burden: The RBI and the government should work together to ease the debt burden on companies, particularly in sectors like telecom and infrastructure. This could involve restructuring existing loans and providing targeted relief to stressed sectors.
4. Improving Infrastructure: The government should continue to invest in infrastructure development, particularly in areas like logistics and power. This will not only reduce the cost of doing business but also create new opportunities for private investment.
5. Encouraging Innovation: The government should incentivize innovation and R&D, particularly in emerging sectors like renewable energy, electric vehicles, and digital technologies. This will help create new growth engines for the economy and attract private investment.

Conclusion: Navigating the Capex Slowdown

The decision by Britannia and Bharti Airtel to scale back their capex plans is a wake-up call for policymakers. While the RBI’s rate cuts have provided some relief, they are not enough to reignite private investment in the face of structural and cyclical challenges. To revive private capex, the government needs to address the underlying issues that are holding back investment, including weak demand, high debt levels, policy uncertainty, and infrastructure deficits.

The road ahead is challenging, but not insurmountable. With the right policy measures and a concerted effort to create a conducive environment for investment, India can overcome the current slowdown in private capex and set the stage for sustained economic growth. The time to act is now.